CMA Final · Strategic Financial Management · Options
A call option on shares of Tata Motors has a strike price of ₹900 and the share currently trades at ₹960. The option premium is ₹75. What is the time value of the call option?
The time value is ₹15. The call is in the money by ₹60 (960 minus 900), which is its intrinsic value. Time value is the premium of ₹75 less this intrinsic value, leaving ₹15.
- A₹15Correct
- B₹60
- C₹75
- D₹135
Explanation
Intrinsic value of the call = 960 - 900 = ₹60. Time value = premium - intrinsic value = 75 - 60 = ₹15. Taking ₹60 as the time value confuses intrinsic value with time value.
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