NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Options
A stock trades at Rs 540. A call option with strike Rs 520 is quoted at a premium of Rs 31. What are its intrinsic value and time value respectively?
Intrinsic value is Rs 20 and time value is Rs 11. The call is in the money by spot minus strike, which is 540 minus 520. The remaining part of the Rs 31 premium, Rs 11, is time value reflecting the chance of further gain before expiry.
- ARs 20 and Rs 11Correct
- BRs 31 and Rs 0
- CRs 11 and Rs 20
- DRs 0 and Rs 31
Explanation
The call is in the money: intrinsic value = 540 - 520 = Rs 20. Time value = premium - intrinsic value = 31 - 20 = Rs 11. Swapping the two figures is the common error in the third option.
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