For each of the following statements indicate whether the statement is true or false and explain why.

a) A speculator wishes to speculate on the potential takeover of Rio Tinto by BHP Billiton.

If the takeover goes ahead the share price of Rio Tinto is expected to increase dramatically. One strategy for the speculator is to buy call options on Rio Tinto.

b) An investor wishes to hedge against the possibility of a dramatic fall in the price of Qantas shares. Assume that the investor currently owns Qantas shares. The shareholder can hedge against this exposure by selling call options on Qantas.

c) As the exercise price increases for an option, all else being the same, the value of a put option will decrease and the value of a call option will increase.