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2. Exercise value and option price Aa Aa The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock's price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or "issue" new options, which is called writing options. Consider the case of ABC Corporation: The following tables presents the data on ABC Corp.'s call options at different stock prices. Based on your understanding of exercise value and option prices, complete the table with a strike price of $20.00: Exercise Value Stock Price Strike Price Value Market Price of Option ($) 1.56 2.10 2.40 4.60 8.00 Time Value 8.00 16.00 20.00 22.00 24.00 20.00 20.00 20.00 20.00 20.00 0.00 2.10 2.40 2.00 4.00 After two weeks, the stock price of ABC Corp. increases to $25.20. Suppose you purchased the shares for $16.00 and then sell the shares at $25.20; your rate of return will be on that transaction. After your analysis, you decided to purchase the option for $2.10, which gives you the right to buy ABC Corp.'s stock at $20.00. If you exercise the option by purchasing the stock at the strike price, you could immediately sell the share of the stock at its market price of $25.20. This will result in a payoff, and the rate of return on your option will be Answer the following questions, based on your understanding of options, option price, and exercise value. True or False: You bought 100 shares of IKnow Inc. at $5.00 per share. You sold a call option for 100 shares with a strike price of $6.15 per share. This is an example of a naked option. This statement is True or False: When you buy a call option, you are obliged to buy the underlying asset at the strike price by the expiration date. This statement is True or False: Option holders have no shareholder rights until they actually own the stock. This statement is

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