- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 2. Forward Commitment and Contingent Claim Features and Instruments
- Subject 2. Contingent Claims: Options
CFA Practice Question
When is the intrinsic value of a call option negative?
B. When the stock price (ST) is less than the exercise price (X)
C. When the stock price (ST) is equal to the exercise price (X)
D. Never
A. When the stock price (ST) is greater than the exercise price (X)
B. When the stock price (ST) is less than the exercise price (X)
C. When the stock price (ST) is equal to the exercise price (X)
D. Never
Correct Answer: D
Since the owner of a call option is not obliged to exercise it when it is out of the money, the lowest intrinsic value the option can have is zero.
User Contributed Comments 13
| User | Comment |
|---|---|
| vadimmuchnik | very tricky, thanks for heads up! |
| surob | Agreed. Tricky one |
| krisscfa | Good one |
| TammTamm | Extremely tricky |
| rfvo | Yip, keep em coming!! N1 |
| magicchip | shheeeesh.. gotta read the question. good one. |
| group | Intrinsic value cannot be negative - by definition |
| mrushdi | For the writer it can be negative. |
| Shammel | Great Question! |
| endurance | marvelous question, indeed! |
| johntan1979 | OWH! Right... thanks to this question, I won't fall for the same trick again if it comes out in the exam. |
| jonan203 | it is impossible to have a negative value with this formula. Call = Max(X-ST, 0) where: X = Strike ST = stock price |
| Inaganti6 | 2MRUSHDI short call was not mentioned ! |