FRM Part I · FRM Exam Part I · Options Markets
A stock trades at $80 and a call option on it has a strike price of $75. Which description of the option's moneyness and intrinsic value is correct?
The call is in the money with an intrinsic value of $5. A call is in the money when the stock price is above the strike, and intrinsic value equals the stock price minus the strike, here 80 minus 75, which is five dollars.
- AIn the money, intrinsic value $5Correct
- BOut of the money, intrinsic value $5
- CIn the money, intrinsic value $0
- DAt the money, intrinsic value $0
Explanation
A call is in the money when the stock price exceeds the strike. Intrinsic value is max(S - K, 0) = 80 - 75 = $5. Calling it out of the money reverses the relationship, and an intrinsic value of $0 ignores the $5 difference.
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