1. What is a call option? A put option? Under what circumstances might you want to buy each? Which one has greater potential profit? Why?
2. What is the intrinsic value of a call option? How do we interpret this value?
3. What is the value of a put option at maturity? Based on your answer, what is the intrinsic value of a put option?
4. If the risk of a stock increases, what is likely to happen to the price of call options on the stock? To the price of put options? Why?
5. T-bills currently yield 3.4 percent. Stock in Deadwood Manufacturing is currently selling for

$58 per share. There is no possibility that the stock will be worth less than $50 per share in one year.

a.What is the value of a call option with a $45 exercise price? What is the intrinsic value?

b.What is the value of a call option with a $35 exercise price? What is the intrinsic value?

c.What is the value of a put option with a $45 exercise price? What is the intrinsic value?

6.The price of Chive Corp. stock will be either $67 or $91 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent.

a.Suppose the current price of the company's stock is $75. What is the value of the call option if the exercise price is $60 per share?

b.Suppose the exercise price is $80 in part (a). What is the value of the call option now?

7.A call option has an exercise price of $60 and matures in six months. The current stock price is

$64, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the call if the standard deviation of the stock is 0 percent per year?

8.