Question 1. (15 points) The exercise price on one of ORNE Corporation’s put options is $30 and the price of the underlying stock is $25. The option will expire in 25 days. The option is currently selling for $5.50.
a. Calculate the option’s exercise value?
b. Calculate the value of the premium over and above the exercise value? Why would an investor pay more than the exercise value for the option.
c. Is this an out-of-the money option, at-the-money, or in-the-money? Why?
d. What will happen to the value of the option if the underlying stock price changes to $24? Why?
e. Would the value of the option likely be higher, lower, or the same if the option had 60 days to expiration instead of 25? Why?
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