CFA Practice Question

There are 227 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to valuing contracts?

I. The time value of both a call and a put will decrease as the contracts near expiration.
II. For a call to be at-the-money, its intrinsic value must be greater than zero.
III. Due to the efficiency of the option markets, the actual price of an option is usually equal to its intrinsic value.
IV. For a put contract to be out-of-the-money, the actual price of the underlying asset must be greater than the strike price of the option.
A. I, II, and III
B. I and IV
C. II, III, and IV
Explanation: II is incorrect because for a call to be at-the-money, its intrinsic value must also be equal to zero.

III is incorrect because even though the option markets are extremely efficient, the actual price of the option contract is equal to the sum of the option's intrinsic value and its time value. Only on the expiration date will the actual price of the option be equal to its intrinsic value.

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