Stock Z is currently trading at $27 per share. Its three-month call option has a strike price of $33 per share. Z’s three-month put option has a strike price of $25 per share. Which of the following is CORRECT?     Investor should not exercise the call option because it is out of the money     Investor should exercise the put option because it is in the money     Investor should exercise the call option because it is in the money     Investor should let both options expire because they are at the money

2. Exercise value and option price The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock's price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or "issue" new options, which is called writing options. The following table presents the data on ABC Corp.'s call options at different stock prices. Based on your understanding of exercise value and option prices, complete the table with a strike price of $24.00: Stock Price ($) 16.00 32.00 40.00 44.00 48.00 Strike Price ($) 24.00 24.00 24.00 24.00 24.00 Exercise Value ($) Market Price of Option ($) 1.56 10.10 0.00 20.00 18.40 22.60 28.00 Time Value ($) 2.10 2.40 4.00 After two weeks, the stock price of ABC Corp. increases to…

A collar is established by buying a share of stock for $54, buying a 6-month put option with exercise price $47, and writing a 6-month call option with exercise price $61. On the basis of the volatility of the stock, you calculate that for a strike price of $47 and expiration of 6 months, N(d1) = 0.7298, whereas for the exercise price of $61, N(d1) = 0.6374. Required: What will be the gain or loss on the collar if the stock price increases by $1? What happens to the delta of the portfolio if the stock price becomes very large? What happens to the delta of the portfolio if the stock price becomes very small?

(c) A risk-neutral competitive market maker clears the market for trading in a stock after observing the incoming orders from a noise trader and an informed trader (who perfectly knows the true value of the stock). The noise trader buys and sells 1 share of the stock with equal probability, whereas the informed trader buys the stock if the value is $14 (high) and sells the stock if the value is $5 (low). The market maker believes initially that there is a 45% probability of high value and a 55% probability of low value. What profits can the informed trader expect to make in this market?