1. Options What is a call option? A put option? Under what circumstances might you want to buy each? Which one has greater potential profit? Why?

2. Options Complete the following sentence for each of these investors: 1. A buyer of call options. 2. A buyer of put options. 3. A seller (writer) of call options. 4. A seller (writer) of put options. The (buyer/seller) of a (put/call) option (pays/receives) money for the (right/obligation) to (buy/sell) a specified asset at a fixed price for a fixed length of time.

3. American and European Options What is the difference between an American option and a European option?

4. Intrinsic Value What is the intrinsic value of a call option? Of a put option? How do we interpret these values?

5. Option Pricing You notice that shares of stock in the Patel Corporation are going for $50 per share. Call options with an exercise price of $35 per share are selling for $10. Whats wrong here? Describe how you can take advantage of this mispricing if the option expires today.

6. Options and Stock Risk If the risk of a stock increases, what is likely to happen to the price of call options on the stock? To the price of put options? Why?

7. Option Risk True or false: The unsystematic risk of a share of stock is irrelevant for valuing the stock because it can be diversified away; therefore, it is also irrelevant for valuing a call option on the stock. Explain.

8. Option Pricing Suppose a certain stock currently sells for $30 per share. If a put option and a call option are available with $30 exercise prices, which do you think will sell for more? Explain.

9. Option Price and Interest Rates Suppose the interest rate on T-bills suddenly and unexpectedly rises. All other things being the same, what is the impact on call option values? On put option values?

10. Contingent Liabilities When you take out an ordinary student loan, it is usually the case that whoever holds that loan is given a guarantee by the U.S. government, meaning that the government will make up any payments you skip. This is just one example of the many loan guarantees made by the U.S. government. Such guarantees dont show up in calculations of government spending or in official deficit figures. Why not? Should they show up?