- CFA Exams
- CFA Exam: Level I 2021
- Study Session 16. Derivatives
- Reading 49. Basics of Derivative Pricing and Valuation
- Subject 7. The Value of a European Option at Expiration

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**CFA Practice Question**

When is the intrinsic value of a call option negative?

B. When the stock price (S

C. When the stock price (S

D. Never

A. When the stock price (S

_{T}) is greater than the exercise price (X)B. When the stock price (S

_{T}) is less than the exercise price (X)C. When the stock price (S

_{T}) 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.

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**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 ! |