FRM Part I · FRM Exam Part I · Properties of Options
A European call option on a non-dividend-paying share is priced at $7.50. The share trades at $52 and the option's strike price is $48. What is the time value of the option?
The time value is $3.50. The call is in the money with intrinsic value of $4 (52 minus 48), and time value is the remaining part of the $7.50 premium, which is 7.50 minus 4.00.
- A$0
- B$3.50Correct
- C$4.00
- D$11.50
Explanation
Intrinsic value is max(52 - 48, 0) = $4. Time value is the option price minus intrinsic value: 7.50 - 4.00 = $3.50. $4.00 is the intrinsic value itself, and $11.50 wrongly adds intrinsic value to the price.
Did you get it right without looking?
One question tells you little. A timed set on Properties of Options shows your real accuracy, how long you take and where you lose marks.
More Properties of Options questions
- An investor buys one European call option on a share with a strike price of $50 for a premium of $3. At expiry the share trades at $58. Igno…
- A European put has strike 60, expires in 6 months, and the stock is at 52. The continuously compounded risk-free rate is 5% and the stock pa…
- An investor buys a European put option on a stock with a strike price of $50 and pays a premium of $3.00. At expiration the stock trades at …
- A trader holds an American call option on a non-dividend-paying stock. Which statement about early exercise of this call before expiry is co…
- A trader holds a portfolio of one long European call (strike $100, premium $6) and one long European put (strike $100, premium $4) on the sa…
- An investor holds a long position in one share of a stock and buys a European put with a strike of $60 for $2.50. The stock was bought at $5…