NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
A call option on a stock has a strike price of Rs 500 and the stock trades at Rs 540 in the spot market. The premium is Rs 55. What is the time value of the option?
The time value is Rs 15. The call is in the money by Rs 40 (spot 540 minus strike 500), which is its intrinsic value. Subtracting this from the Rs 55 premium leaves Rs 15 as the time value, the amount paid for remaining time and volatility.
- ARs 15Correct
- BRs 40
- CRs 55
- DRs 95
Explanation
Intrinsic value of the call = 540 - 500 = Rs 40. Time value = premium - intrinsic value = 55 - 40 = Rs 15. Rs 40 is merely the intrinsic value, and Rs 95 wrongly adds the two.
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