6. Answer the following questions based on the following quotation. On October 1, 2007, S&P 500 closed at 1547 where the quotation of CALL options on S&P 500 was as follows. Those contracts expire in October 2007.

Strike Price	Open	High	Low	Last	Sett
1540	--	--	--	--	31.70
1600	1.70	3.60	1.70	3.00	3.35

(a) Which option is in the money?

(b) Decompose the value of 1540 call, $31.7, into intrinsic value and time value.

(c) Again using the call with exercise price of 1540, what would be your cash proceeds if you exercise the option on October 1 (index options are settled by cash)? Assume that both dividends and transaction costs are small enough to be ignored. Based on this answer and answer on (b), does it make sense to exercise an American call before expiration? Explain.

(d) Assume that put-call parity holds for these options (it does not exactly hold since the above options are all American). What should be the value of a PUT on S&P 500 with exercise price of 1600? Assume that the annual risk-free rate is 5%.