How does the price of an option and the exercise price, Financial Management

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How does the price of an option and the exercise price

1. How does the price of an option and the exercise price affect the payoff from an option.

2. Suppose that the price of the underlying is $40 and that the option price is $5.

a. If the exercise price for a put option is $42, what are the intrinsic value and the time premium for this option?

b. If the exercise price for a call option is $50, what are the intrinsic value and the time premium for this option?

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Financial Management: How does the price of an option and the exercise price

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