NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
A stock trades at Rs 800. A Rs 780 strike call is priced at Rs 35 and a Rs 780 strike put is priced at Rs 10. Which statement is correct about the call's premium?
The call has intrinsic value of Rs 20 and time value of Rs 15. Intrinsic value is spot Rs 800 minus strike Rs 780, and time value is the remaining part of the Rs 35 premium after deducting that intrinsic value.
- AIntrinsic value Rs 20 and time value Rs 15Correct
- BIntrinsic value Rs 35 and time value zero
- CIntrinsic value Rs 15 and time value Rs 20
- DIntrinsic value zero and time value Rs 35
Explanation
Call intrinsic value = spot minus strike = 800 - 780 = Rs 20. Time value = premium minus intrinsic = 35 - 20 = Rs 15. The put's premium of Rs 10 is entirely time value as it is out of the money, but is irrelevant to the call's split.
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