Asked by Gavin Laielli on May 12, 2024
Verified
Before expiration, the time value of a call option is equal to
A) zero.
B) the actual call price minus the intrinsic value of the call.
C) the intrinsic value of the call.
D) the actual call price plus the intrinsic value of the call.
Time Value
The concept that money available at the present time is worth more than the same amount in the future, due to its potential earning capacity.
Call Option
A financial contract that gives the holder the right, but not the obligation, to buy a specified quantity of an underlying asset at a predetermined price before a specified date.
Intrinsic Value
Intrinsic value refers to the actual value of a company, stock, currency, or product determined through fundamental analysis without reference to its market value.
- Explain the concept of intrinsic value and time value in option pricing.
Verified Answer
FW
Frances WilliamsMay 14, 2024
Final Answer :
B
Explanation :
The time value of a call option is the difference between the option's price (its premium) and its intrinsic value (the value if exercised immediately). It represents the extra amount an investor is willing to pay over the intrinsic value, based on the chance that the stock price will increase before expiration.
Learning Objectives
- Explain the concept of intrinsic value and time value in option pricing.