You hold 20,000 shares in ABC plc which are currently priced at 500p. ABC has developed a revolutionary flying machine. If trials prove successful the share price will rise significantly. If the government bans the use of the machine, following a trial failure, the share price will collapse. Required:

(a) Explain and illustrate how you could use the traded options market to hedge your position.

Further information (Hint: Go for Sept. puts with the 450 exercise price).

Current time: 30 January.

Traded option quotes on ABC plc on 30 January:

(b) What is meant by intrinsic value, time value, in-the-money, at-the-money and out-of-the-money?

Use the above table to illustrate.

Calls Puts Option March June Sept. March June Sept. ABC plc 62 88 99 19 450 500 550 30 50 20 70 33 11 30 70 42 85 27 57 93 9