- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 8. Pricing and Valuation of Options
- Subject 1. Option Exercise Value, Moneyness, and Time Value
CFA Practice Question
Consider a stock call option with the following characteristics:
Underlying asset: 100 shares of Coca Cola stock
Exercise price: $60 per share
Premium: $1.25 per share
Expiration date: November
B. is "in the money" with an intrinsic value of zero
C. is "out of the money" with an intrinsic value of zero
Type of option: call option on stock
Underlying asset: 100 shares of Coca Cola stock
Exercise price: $60 per share
Premium: $1.25 per share
Expiration date: November
The current market price of Coca Cola stock is $54.94 per share. The call option ______.
A. is "in the money" with an intrinsic value of $5.06
B. is "in the money" with an intrinsic value of zero
C. is "out of the money" with an intrinsic value of zero
Correct Answer: C
CT = MAX(0, ST - X) = MAX (0, 54.94 - 60) = MAX (0, -5.06) = 0
User Contributed Comments 5
| User | Comment |
|---|---|
| vrs3 | What's that 0 before St-X... |
| kclau | MAX(0,St-X)means greater of 0 or St-X, as such when St<X, the option will not be exercised => intrinsic value will be zero. |
| Done | Am I mistaken but I thought out-of-the-money call options don't have an intrinsic value because they are out-of-the-money? Why do a calculation? |
| adidas | Even if an option is out-of-money it still has value (time value): it may become in-the-money later. Check the market and you will find out that most options are out-of-money but they are not free. Calculation is needed. |
| Rotigga | "The intrinsic value of a call option on its Expiration Day is CT = MAX (0, ST - X)" There is no time value in this formula! |