Question 1 Introduction (50 points total)

Say that on a recent day, Wal-Mart stock closed at $55.19 per share, down $.05 on the day. Consider the following chart giving the premium as of close of trading on that day, on various options on Wal-Mart stock:PS06-Q01.pdf

In the questions that follow, use the Last Sale column to answer questions which involve option pricing.

(Click hereto download the excel spreadsheet of the Wal-Mart chart)

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1a.What was the premium on the Jun. 16 WMT 47.50 call, i.e., the Wal-Mart call which expires in Jun. 16 and has a strike price of $47.50?

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1b.How much would an investor who wanted to buy 1 contract of this option have had to spend?

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1c.What is the formula for the intrinsic value of a call? What was the intrinsic value of the May. 16 WMT 50 call? Was this option in the money or out of the money? What was the time value of this option?

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1d.Was the Jun. 16 WMT 60 call in or out of the money? What was the intrinsic value of this option? What was the time value of this option?

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1e.What was the premium on the Jun.16 WMT 60 put? Was this option in or out of the money? What was the intrinsic value of this put? What is the time value?

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1f.What was the intrinsic value of the May.16 WMT 50 put? Was this option in or out of the money? What was the options time value?

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Question 2 Introduction (50 Points)

ErenCo is an up-and-coming stone quarry company. A recent report, reflecting the general sentiment of all market participants, projected the following prices and probabilities for ErenCo stock on May. 17, 2016:

Probability	1/3	1/2	1/6
Stock Price	$15	$10	$6

For each of the following questions, be sure to show all of your work.

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2a.According to the EMH, what would you expect the market price of ErenCo stock to be today? Why?

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2b.Nancy, an investor in ErenCo, decides to buy a put option on ErenCo stock with a strike price (exercise price) of $9 which expires on the third Friday of May, 2016. What would she have to pay in todays market for this option? In general, what determines the price an investor will have to pay for an option?