Question: A call option is offered on a stock; the option has an expiration of 65 days and a strike price of $40. The underlying stock to the call option trades for $43.15. The volatility of the stock is 35% per year, and the risk-free rate is 3.5% per year.

1. Value the call option.
2. If the stock price increases to $45.00, and everything else stays the same, what is the new value of the call option?
3. What is the percentage increase in the price of the stock? What is the percentage increase in the price of the call option?
4. Now the stock price declines to $41.00. What is the percentage decrease in the price of the stock (from $45.00)? What happens, in both dollars and percent, to the price of the call?
5. What are similarities and differences between holding the call option and holding the stock?

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