Problem:
The exercise price on one of ORNE Corporation's call options is $25 and the price of the underlying stock is $29. The option will expire in 35 days and is currently selling at $5.50.
Required:
Question 1: Calculate the option's exercise value? What is the significance of this value?
Question 2: If the price of the underlying stock changes to $33 per share, will the market value of the option increase, decrease, or remain the same and why.
Question 3: If Orne Corporation had issued a put option (instead of the call), would its value increase, decrease, or remain the same if the price of the underlying stock increased? Why?
Note: Provide support for your rationale.