Question:

(a) A stock currently sells for $80 and a put option with an exercise price of $80 currently sells for $2. Find the percentage gain to an investor in the common stock and the option if

(i) The stock goes up to $84 at the expiration date of the option.
(ii) The stock price remains constant.
(iii) The stock price goes down to $78 at the expiration date of the option.
(iv) The stock price goes down to $76 at the expiration date of the option.

(b) Define

(i) A European call option.
(ii) The inherent value of a call option.
(iii) The time value of a call option.

(c) A stock sells for $100, a call option with an exercise price of $98 currently sells for $6, a put option with the same exercise price sells for $2. Find

(i) The inherent value of the call.
(ii) The time value of the call.
(iii) The inherent value of the put.
(iv) The time value of the put.

(d) If an investor purchases one long call option and one long put option. Find
(i) Two break-even stock prices.
(ii) The largest amount of loss.

(e) Display profit diagrams for long stock and for short stock.