The option delta (i.e., hedge ratio) for a call on Ajax stock is 0.7, while the delta for the put on Ajax stock is -0.3 You wish to hedge a portfolio of 100,000 shares of Ajax. Recall that the option delta is the change in option price for a $1 increase in its stock1.

1. You are planning to invest in a call option for which the corresponding stock has yet to issue a dividend. The spot price is $40 per share and its annualized volatility is measured at 68%. The risk free rate is currently 2.5%, while the option tranche you are considering has a strike price of $50 and 18 months to expiration. What is the intrinsic value of the call?

2. Given the intrinsic value of the call you discovered in #1, using put-call parity, what is the value of the corresponding put (strike $50; 18 months to expiration)?