18. Debra is a jeweler that regularly purchases ingots of gold so as to manufacture jewelry. She is concerned that adverse price movements will increase the cost of manufacturing her products and so purchases a call option written on gold. The option she purchases is a European-style option with an exercise price of $2,600 for an ounce of gold. Debra pays $350 for the option and the current price of gold is $2,400 per ounce.

a) Draw the profit diagram of the option described above. Make sure you label all axes, turning points and intercepts.

b) What is the time value and intrinsic value of the option described in the text accompanying the question above?