CFA Practice Question

There are 206 practice questions for this study session.

CFA Practice Question

The maximum value of a call is equal to ______.

A. the price of the stock minus the exercise price
B. the exercise price times one plus the risk-free return
C. the price of the stock
Correct Answer: C

User Contributed Comments 15

User Comment
Aimy Isn't it S-X?
gruszewski maybe they assume the minimum strike = 0 --> max possible value = underlying
synner S-X = intrinsic value?
tengo it seems logical to S-X, but if the stike is zero then the maximun value of the expression is S since negative strikes are not allowed
0is4eva "The MAXIMUM value of a CALL is the current value of the underlying. A call is a means of buying the underlying. It would not make sense to pay more fo the right to buy the underlying than the value of the underlying itself."
"For a PUT, it makes a difference whether the put is European or American. One way to see the maximum value for puts is to consider the best possible outcome for the put holder. The best outcome is that the underlying goes to a value of zero. Then the put holder could sell a worthless asset for X."
The MINIMUM lower bound of an American option:
CALL >= Max(0, S-X) __/
PUT >= Max(0, X-S)
The value of an American option will be at least its intrinsi value due to arbitrage.
Rotigga What kind of person would be crazy enough sell a call option at a $0 strike price?
danrow It makes sense what 0is4eva said, who is going to buy a call that is more expensive than the underlying?? If it was equal the profit would be zero.
danrow Also, when you exercise the call option, you do not get S-X... you actually get S-C (C= the value of the call)
studyprep By the way this question is not asking about the intrinsic value = (S - X), which you pay when you buy the option. But overall/maximum cost that you could be incurred = intrinsic value that you paid when you bought the option + strike price. And that would be maximum you pay = the price of the stock at the time when you bought the stock. What is the pay off then? Your payoff is the difference between current strike price and what you overall paid.
Example: Suppose current stock price = $25, strike price = $20, Then you would like to pay for the call option now = (25 - 20) = $5. Lets say in future price of the underlying security = $100
(Now Important ) Overall/Maximum you would pay = $25. Where as your payoff = $75
yael The maximum value of a call or put option could be any value between zero and the difference between the underlying price and exercise price. By establishing lower bounds, we are able to tighten the range so that at expiration, the minimum value of a call and a put is zero.

The maximum value of a call option is: max (0, underlying price - exercise price).
The maximum value of a put option is max (0, exercise price - underlying price).
viannie Max value of a call option = current value of the underlying. It won't make sense to buy the right to buy the asset at a price higher than the value of the underlying. (P100 - 101)

Pay-off values of call option = between zero to (S-X)

So one is max value of the option one would pay for and the other is the max pay-off value at expiration.
CJPerugini Value is different than price. For a call option the value is equal to it's option premium, which is the amount a buyer is willing to pay over the exercise price.
fabsan Theorically the maximum value of a Call is infinite minus the strike price. That should be equal to infinite still. This theory hold because we assume that the stock price can rise to infinite.
Inaganti6 A is right if asked for payoff or intrinsic....

C is right for value which asks for absolute upper value.....

Gotta read these questions carefully.
Samir3112 If the Price of the Call option is greater than the underlying, then he can go short on the call option and long on the underlying to create an arbitrage opportunity , when the option is in money.
You need to log in first to add your comment.