CMA Final · Strategic Financial Management · Options
A call option on shares of Kaveri Motors has a strike price of Rs 450. The spot price is Rs 480 and the option premium is Rs 38. What is the time value of the option?
The time value is Rs 8. The call is in the money with intrinsic value of Rs 30 (480 minus 450). Time value is the premium of Rs 38 less this intrinsic value, giving Rs 8.
- ARs 8Correct
- BRs 30
- CRs 38
- DRs 68
Explanation
Intrinsic value of the call = 480 - 450 = Rs 30. Time value = premium - intrinsic value = 38 - 30 = Rs 8. Rs 30 is only the intrinsic value, and Rs 38 is the full premium.
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