CMA Final · Strategic Financial Management · Options
Shares of Narmada Steel trade at Rs 400. A put option with strike Rs 420 and expiry in 3 months has a premium of Rs 35. What is the time value of this put?
The time value is Rs 15. The put is in the money by Rs 20 (strike 420 less spot 400), and the premium is Rs 35, so the part of the premium not explained by intrinsic value is 35 minus 20, which equals Rs 15.
- ARs 35
- BRs 15Correct
- CRs 20
- DRs 55
Explanation
The put is in the money: intrinsic value = 420 - 400 = Rs 20. Time value = premium - intrinsic = 35 - 20 = Rs 15. Rs 55 wrongly adds intrinsic value to the premium.
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