1. How does the price of an option and the exercise price affect the payoff from an option.
2. Suppose that the price of the underlying is $40 and that the option price is $5.
a. If the exercise price for a put option is $42, what are the intrinsic value and the time premium for this option?
b. If the exercise price for a call option is $50, what are the intrinsic value and the time premium for this option?