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Suppose a stock is priced at $162. You are bullish on the stock and are considering buying March call options with an exercise price of $152 and $172, respectively. The 152 call is priced at $14.50 and the 172 call is quoted at $5.75.
a. What are the intrinsic and time values of each of the options?
b. Are the 152 and 172 call options in or out of the money? If you buy the 172 call option, what price should the stock reach before you make profit?
c. Discuss whether higher or lower stock price volatility and time to maturity of the option would increase the chance for a higher profit, if you buy the 172 call option.
d. Suppose that you plan to use the option as a hedge. When would the option hedge be better than a futures or forward hedge?
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