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The exercise price on one of ORNE Corporation's put options is $30 and the price of the underlying stock is $25. The option will expire in 25 days. The option is currently selling for $5.50.

Calculate the option's exercise value?
Calculate the value of the premium over and above the exercise value? What does this value represent?Is this an out-of-the money option, at-the-money, or in-the-money? Why?
What will happen to the value of the option if the underlying stock price changes to $24? Why?
Would the value of the option likely be higher, lower, or the same if the option had 60 days to expiration instead of 25? Why?

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Solution Summary

The solution explains various calculations relating to options.

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Q -Calculate the option's exercise value?

Answer - For a put option, the exercise value is the difference between the strike price and the current asset price. In this question, the strike price is $30 and the current asset price is $25.
Exercise value = 30-25 = $5

Q- Calculate the value of the premium over and above the exercise value? What does this value represent? Is this an out-of-the money option, at-the-money, or in-the-money? Why?

Answer - The premium is the difference between the exercise value and the option price. The exercise value is $5 and the ...

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