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Financial advisory
RES5Financial Advisory Services✓A call option on shares has a strike of $10. The shares trade at $12 and the option costs $2.50. Which statements are CORRECT? (a) The option is in the money. (b) Its intrinsic value is $2. (c) Its time value is $0.50. (d) The holder's maximum loss is $2.50. Which of the following are CORRECT?
Spot above strike makes a call in the money (a). Intrinsic value = 12 − 10 = $2 (b). Time value = premium − intrinsic = 2.50 − 2 = $0.50 (c). A holder can lose at most the premium paid (d). All four hold.
Do the arithmetic before rejecting any limb — every limb here is checkable.
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