CFA Practice Question

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CFA Practice Question

Consider a stock call option with the following characteristics:

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!
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