HW No. 1. Due WED FEB 10 page 1 of 2 The table below describes options prices for a stock MMM on AUG 25 2009. The strike prices Are in the leftmost column and there are four expiration months: Sep09, Oct09, Jan10 and Apr10. The stock price on August 25 was S = 27.50/share. Q1. Use the table below and indicate all the options that are in-the-money, out-of- the-money or at-the-money. Q2. a. Write the definition of intrinsic and extrinsic(time) values and their relation to the option market premium. (See my slides) b. For all the options in the table indicate how much of the premium is intrinsic value and how much is extrinsic value. Q3. Indicate the official expiration dates of the options in the table. Q4. Read CH III in the OCC publication and about stock splits in the text book. Suppose that MMM had a three-for-one split right now – that is, when the prices in the table are the market prices. Explain in details (and show the new numbers) the price changes, and the rest of the adjustments MMM; WED August 25 2009. S = 27.50 K C A L L S - L A S T P U T S - L A S T Sep 09 Oct 09 Jan 10 Apr 10 20 --- 8.50 .35 25 3.50 3.80 .15 .50 27.5 1.35 .55 30 1.70 2.40 2.75 4.20 32.5 .45 .75 1.30 5.85 8.75 35 .05 1.00 8.10 8.85 9.50

Page 2 of 2 Q5. On August 25 you bought the OCT, 25, call and at the same time you bought the OCT, 25 put. Suppose that you hold both option to their expiration. At the expiration of the options, which option will you exercise and what will be you profit or loss if MMM’s price at expiration were: a. S = 37; b. S = 19; c. S = 25. Your profit is: per share cash flow at expiration – initial cost per share. Q6. On August 25 you sold the the OCT, 25, call and at the same time you sold the OCT, 25 put. Suppose that both options were not exercised till their expiration. Calculate your profit/loss at expiration if MMML’s price at expiration were: a. S = 37; b. S = 15; c. S = 25. Your profit is: per share cash flow at expiration – initial per share cost. Q7. On august 25 you bought the APR 30 call and simultaneously sold the APR 32.5 call. The options were not exercised till their expiration. Calculate your profit/loss at expiration if MMML’s price at expiration were $26.50/share. Q8. On august 25 you bought the APR 30 put and simultaneously sold the APR 32.5 put. The options were not exercised till their expiration. Calculate your profit/loss at expiration if MMM’s price at expiration were $26.50/share.