The development of options can be traced over thousands of years. The Phoenicians and Romans used the concept of an option to trade. Today options are a well-established part of world financial markets. In 1976 Australia established its first equity options market after Chicago in 1973. Some important aspects of option specification to note are the underlying parcel is 1,000 shares for stock options and 10 times the index level for index options. The prices are quoted in cents per share for stock options and points per contract for index options. The exercise requires the delivery of stock options and cash settlement for index options. An active trader in the stock market in Philadelphia is expecting SONY (SNY) shares to rise by 18.75%. Currently, it is trading at $4.00. The investor feels that by buying a MARCH call option contract at $0.39 per share would be sufficient time for the market expectation to be realized. Assume the contract covers 1,000 shares. This contract is referred to as SNY/MAR/375 Call.

a) If the investor decides to exercise his option, present with clear workings the possible trade outcome for the trader in dollars and percentage and the real value of the option. (5 marks)

b) List three reasons why the active trader in Philadelphia chose to buy a call option (3 marks)