1. Compute the time value and intrinsic value for the following options. Show your work!

(4 marks)

2. Using the above information, you take the long position in a call option with an exercise price of $40.00 and that expires in August. Prepare a profit/loss (net payoff) schedule for your investments for market prices of $25, $30, $35, $40, $45, $50 and $55 (2 marks)

c. Graph your payoff from the call option

d. Using the above information, you take the short position in a call option with an exercise price of $40.00 and that expires in August. Prepare a profit/loss (net payoff) schedule for your investments for market prices of $25, $30, $35, $40, $45, $50 and $55

TRP - TransCanada Corporation Share price 39.00 Calls Month/Strike + 11 AU 38.00 + 11 AU 40.00 + 11 AU 42.00 + 11 SE 38.00 + 11 SE 40.00 + 11 SE 42.00 Ask Price 1.40 0.20 0.05 1.60 0.52 0.14 Puts Strike + 11 AU 38.00 + 11 AU 40.00 + 11 JL 42.00 + 11 SE 38.00 + 11 SE 40.00 + 11 SE 42.00 Ask Price 0.25 1.25 3.10 0.53 1.54 3.20 lintrinsic Value Time Value 40 AUG Call 42 SEP Put Market Prices 40.00 45.00 25.00 30.00 35.00 50.00 55.00 Market Prices 35.00 40.00 45.00 25.00 30.00 50.00 55.00 TRP - TransCanada Corporation Share price 39.00 Calls Month/Strike + 11 AU 38.00 + 11 AU 40.00 + 11 AU 42.00 + 11 SE 38.00 + 11 SE 40.00 + 11 SE 42.00 Ask Price 1.40 0.20 0.05 1.60 0.52 0.14 Puts Strike + 11 AU 38.00 + 11 AU 40.00 + 11 JL 42.00 + 11 SE 38.00 + 11 SE 40.00 + 11 SE 42.00 Ask Price 0.25 1.25 3.10 0.53 1.54 3.20 lintrinsic Value Time Value 40 AUG Call 42 SEP Put Market Prices 40.00 45.00 25.00 30.00 35.00 50.00 55.00 Market Prices 35.00 40.00 45.00 25.00 30.00 50.00 55.00