CMA Final · Strategic Financial Management · Options
Shares of Kaveri Motors trade at ₹480. A European put option on the share with a strike price of ₹520 and expiry in three months is quoted at ₹55. What is the intrinsic value and the time value of this put?
The put is in the money by strike minus spot, which is 520 minus 480, giving intrinsic value of ₹40. The premium of ₹55 less this intrinsic value leaves a time value of ₹15.
- AIntrinsic value ₹40; time value ₹15Correct
- BIntrinsic value ₹55; time value ₹0
- CIntrinsic value ₹15; time value ₹40
- DIntrinsic value ₹0; time value ₹55
Explanation
Intrinsic value of a put = max(X - S, 0) = 520 - 480 = ₹40. Time value = premium - intrinsic value = 55 - 40 = ₹15. Option ₹15 / ₹40 swaps the two components, and ₹0 / ₹55 wrongly treats the put as out of the money.
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