(a) Roger Vivier Ltd enters into a call option on Santos Limited shares with an exercise price of $19.25 per share in two months, and pays a premium of $0.60 per share.

Required: i) Define an option and explain the premium and the exercise price. (4 marks)

ii) Draw two fully labelled diagrams of the call option showing the profit and loss profile of the option buyer and the writer of the option (including the break-even price). (4 marks) iii) At what minimum stock price will the option buyer exercise the option on the expiration date?