NORREL Corporation's stock is selling for $35 per share. An investor is considering buying a call option with an exercise price of $40. The investor is willing to pay the premium of 50 cents per option.
a. Calculate the exercise value of the option?
b. Why is an investor willing to pay 50 cents an option when the stock is going for $35?
c. Calculate the exercise value if the price of the stock increases to $42 per share.
d. If the exercise price for both the call option and the put option is $40, which will have a higher premium if the underlying stock price falls to $30 per share? Why?