Question

Department : _ID: Name : Derivatives Securities The Second In-Class Assignment Citigroup (NYSE:C) has several American stock options traded in the market. Assume the stock price today is 203. Strike Price 200 210 220 April,2020 July,2020 July,2020 Call Call Put (A) (G) (B) (E) (C) (1) (D) L (H) (i) (ii) Among Option (A) to (I), which is (are) Out-of-the-money Call option(s)? Among Option (A) to (I), which is (are) In-the-money put option(s)? Suppose the price of Option (B) is 6.4, what is its intrinsic value? Suppose the price of Option (E) is 8.2, what is its intrinsic value? Suppose the price of Option (A) is 9.8, what is its time value? Suppose the price of Option (G) is 4.5, what is its time value? Comparing Option (C) and (F), whose option price is higher? Comparing Option (H) and (I), whose option price is higher? (vi) (vii) (viii)

Answer 1

(i)

Call is out of the money if strike price is higher than current price

Therefore, Out of the money Call Options are B,E,C & F

(ii)

Put is in the money if strike price is higher than current price

Therefore, In the money put options are H & I

(iii)

Intrinsic Value of Call = Higher of (Current Price - Strike Price) & 0

Therefore, Intrinsic Value = 0

(iv)

Same as (iii)

Therefore, Intrinsic Value = 0

(v)

Time Value = Price - Intrinsic Value

Intrinsic Value same as iii

Therefore, Time Value = 9.8 - (203 -200) = 9.8 - 3 = 6.3

(vi)

Intrinsic Value of Put = Higher of (Strike Price - Current Price) & 0

Therefore, Time Value = 4.5 - 0 = 4.5

(vii)

Options C & F are of sane strike price but different expiry. Therefore, Price of the on with LATER expiry would be higher because of more time value. Therefore, Price of F would be higher.

(viii)

Options H & I are of same expiry but different strike price. As both are Out of the money, Price of one with strike price NEARER to the current price would be more. Therefore, Price of H would be higher.

(If this was helpful then please rate positively. Thank You:)