Asked by Katherine Roman on May 09, 2024
Verified
You own five put option contracts on XYZ stock with an exercise price of $25. What is the total intrinsic value of these contracts if XYZ stock is currently selling for $24.50 a share?
A) -$250
B) -$50
C) $0
D) $50
E) $250
Put Option
A financial contract giving the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time.
Exercise Price
The set price at which an option's holder has the right to purchase or sell the asset in question.
Intrinsic Value
The true or inherent value of a financial asset, based not on market price but on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors.
- Understand the concept of intrinsic value in both put and call option contracts.
Verified Answer
BÇ
Berfin ÇAKMAKMay 13, 2024
Final Answer :
E
Explanation :
The intrinsic value of a put option is calculated as the exercise price minus the current stock price, provided this difference is positive. Since the exercise price is $25 and the stock is currently at $24.50, each option has an intrinsic value of $0.50 ($25 - $24.50). With five contracts, each representing 100 shares, the total intrinsic value is $0.50 * 5 * 100 = $250.
Learning Objectives
- Understand the concept of intrinsic value in both put and call option contracts.