Question

Consider European CALL options on the same non-dividend paying stock XYZ. Assume that the price of stock XYZ is 100. Which of the following call options has the highest price?

Select one:

a. Exercise Price = 100, Time to expiration =1 year

b. Exercise Price = 90,  Time to expiration = 2 year

c. Exercise Price = 100, Time to expiration =2 year

d. Exercise Price = 90,  Time to expiration = 1 year

Answer 1

An Option is Valued by Premium. Premium consist of two values one is Intrensic Value, second is Time Value of Money. Intresnsic Value is given by = Stock Price - Exercise Price while time value is Option vale - Intrensic Vlaue. HIgher the time to expiration, higher will be the value.

So, the Stock which have Strike Price of 90 and time to ecpiration is 2 years will have the highest value.

Option B is Correct. Exercise Price = 90,  Time to expiration = 2 year