Practice Problem 4:

a)Explain in words what a deriviative financial product is.

b)Explain in words the process of creating an option. What is the responsibility of the seller and of the holder of an option.

c)Explain in words what a call option is and when it would be in the money and when it would be out of the money. Use the stock price and exercise price in your explanation.

d)Explain what a put option is and when it would be in the money and when it would be out of the money. Use the stock price and exercise price in your explanation.

e)On December 30, the price of Kotter 's shares is $39.75 and the Kotter JAN call option with a strike price of $36.00 is trading at $4.00. What is the intrinsic value of this option? Explain the effect of this value being zero or negative.

f)On December 30, the price of Kotter's shares is $39.75 and the Kotter JAN 42 put option is trading at $2.55. What is the intrinsic value of this option. Explain the effect of this value being zero or negative.