The exercise price on one of ORNE Corporation's call options is $25 and the price of the underlying stock is $30. The option will expire in 30 days and is currently selling at $5.50.
a. Calculate the option's exercise value? What is the significance of this value?
b. Why is an investor willing to pay more than the exercise value for the option?
c. If the price of the underlying stock changes to $32 per share, will the market value of the option increase, decrease, or remain the same? Why
d. 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?