1) You have taken a long position in a call option on IBM common stock. The option has an exercise price of $180 and IBM’s stock currently trades at $180. The option premium is $5 per contract.

a. How much of the option premium is due to intrinsic value versus time value?

b. What is your net profit on the option if IBM?s stock price increases to $190 at expiration of the option and you exercise the option?

2) You have purchased a call option contract on Johnson & Johnson common stock. The option has an exercise price of $90.00 and J&J’s stock currently trades at $90.43. The option premium is quoted at $2.17 per contract.

a. Calculate your net profit on the option contract if J & J’s stock price rises to $94.00 and you exercise the option.

b. Calculate your net profit on the option contract if J & J’s stock price falls to $89.50 and you exercise the option.

c. If J & J’s stock price falls to $89.50 show that it is more profitable to exercise than not exercise the option you have purchased.

3) 1. An investor purchases a mutual fund for $45. The fund pays dividends of $1.50, distributes a capital gain of $2, and charges a fee of $2 when the fund is sold one year later for $52.50. What is the net rate of return from this investment?

4) An employee with 25 years of service at a company is considering retirement at some time in the next 10 years. The employer uses a final pay benefit formula by which the employee receives an annual benefit payment of 2.0 percent of her average salary during her last five years of service times her total years employed. The employee’s average salary over the last 5 years of service is as follows: Average Salary during Last Five Years of Service Retire now $ 125,000 Retire in 5 years 135,000 Retire in 10 years 140,000 Calculate the annual benefit payment for retirement now, in 5 years, and in 10 years.