Question

The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 19 through 24. Calls Puts Dec Nov Dec Jan Nov Jan 83/8 10 11 1/2 5/16 Strike 105 110 115 71/8 8 1/4 33/4 4 3/8 112 15/16 2 13/16 2 1/2 4 3/4 1 3 7/8 51/4 4 3/4 The stock price was 113 1/4. The risk-free rates were 7.30 percent (November). 7.50 percent (December) and 7.62 percent (January). The times to expiration were .0384 (November). .1342 (December), and .211 (January). Assume no dividends unless indicated. 19. What is the intrinsic value of the December 115 put? a 1.75 b. 0.00 3.875 d. 3.00 e. none of the above 20. What is the intrinsic value of the January 110 call? AAN 8.25 o 5.00 none of the above What is the time value of the December 105 put? 1.25 8.25 c. 0.00 7.00 none of the above What is the time value of the November 110 call? 0.00 4.375 1.125 d. 3.25 none of the above

Answer 1

19]

The put option is in-the-money as the strike price of the put option is higher than the stock price.

Intrinsic value = strike price of put option - stock price

Intrinsic value = 115 - 113 1/4

Intrinsic value = 115 - 113.25

Intrinsic value = 1.75

20]

The call option is in-the-money as the strike price of the call option is lower than the stock price.

Intrinsic value = stock price - strike price of call option

Intrinsic value = 113 1/4 - 110

Intrinsic value = 113.25 - 110

Intrinsic value = 3.25

21]

time value = option price - intrinsic value

The put option is out-of-the-money as the strike price of the put option is lower than the stock price.

As the put option is out-of-the-money, its intrinsic value is zero.

time value = option price - intrinsic value

time value = 1 1/4 - 0

time value = 1.25

22]

time value = option price - intrinsic value

The call option is in-the-money as the strike price of the call option is lower than the stock price.

Intrinsic value = stock price - strike price of call option

Intrinsic value = 113 1/4 - 110

Intrinsic value = 113.25 - 110

Intrinsic value = 3.25

time value = option price - intrinsic value

time value = 4 3/8 - 3.25

time value = 4.375 - 3.25

time value = 1.125