A particular call is the option to buy a stock at $25. It expires in six months and currently sells for $4 when the price of the stock is $26.

a. What is the intrinsic value of the call? What is the time premium paid for the call?

1. Intrinsic value: $1

2. Time premium: $3

b. Value of this call after six months w/stock @ $20? $25? $30? $40?

1. Stock Price $20, Call Value = $

2. Stock Price $25, Call Value = $

3. Stock Price $30, Call Value = $

4. Stock Price $40, Call Value = $

c. The stock rises to $40 at the expiration date of the call:

1. What is the percentage increase in the value of the call? 275%

2. Does this example illustrate favorable leverage?

d. If an individual buys the stock and sells this call, what is the cash outflow (i.e., net cost) and what will the profit on the position be after six months if the price of the stock is $10? $15? $20? $25? $26? $30? $40?

1. net cash outflow =

2. loss with stock @$10 =

3. loss with stock @$15 =

4. loss with stock @$20 =

5. profit with stock @$25 =

6. profit with stock @$26 =

7. profit with stock @$30 =

8. profit with stock @$40 =

e. If an individual sells this call naked, what will the profit or loss be on the position after six months if the price of the stock is $20? $26? $40?

1. profit with stock @$20 = 4

2. profit with stock @$26 = 3

3. loss with stock @$40 =-11