1. Suppose you paid $5 for a $20 call option (strike price = $20) months ago. This option expires today and the current stock price is $22. If you exercise the call, the call payoff is $2 (=$22 - $20) and the profit will $2 - $5 = -$3. Should you exercise or not exercise the call? Explain.
2. The current price of a stock is $94, and a three-month European call option with a strike price of $95 currently sells for $4.70. An investor who feels that the price of the stock will increase is trying to decide between investing in 100 stocks and investing in 2,000 call options (20 contracts) for 3 months. Both strategies cost an initial investment of $9,400. How high does the stock price have to rise in 3 months for the option strategy to be more profitable than the stock strategy? In other words, at what stock price in 3 months, will the 2 strategies result in the same profit?