CFA Level I · CFA Level I Exam · Pricing and Valuation of Options
An investor holds a European call option on a stock with an exercise price of 50. The stock currently trades at 56. The option is most likely described as:
The call is in-the-money with an intrinsic value of 6. A call has value from exercise when the stock price of 56 is above the exercise price of 50, and the intrinsic value is the difference, 56 minus 50, which equals 6.
- Aout-of-the-money, with an intrinsic value of zero
- Bat-the-money, with an intrinsic value of 6
- Cin-the-money, with an intrinsic value of 6Correct
Explanation
A call is in-the-money when the underlying price exceeds the exercise price. Intrinsic value is max(0, 56 - 50) = 6. The first option reverses the moneyness of a call, and the second treats a 6-point gap as at-the-money.
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