Question

suppose it is January 1990 and the current spot rate for the DM is $ 0.5925. the call premium on a call option with an exercise price of $ 0.5675 is $0.0373. what is the intrinsic value of one DM 62500 call option?

Answer 1

Solution:

A call option will be exercised only if, the Spot price on expiry is greater than the Exercise price of the call option.

In case of a call option the Intrinsic value is the Maximum of [ ( Spot price – Exercise Price ) , 0 ]

As per the information given in the question we have

Exercise price = $ 0.5675

Spot Price = $ 0.5925

Thus the ( Spot price – Exercise Price ) = $ 0.5925 - $ 0.5675 = $ 0.0250

Since $ 0.025 is greater than ‘ 0 ‘ , the Intrinsic value of one call option = $ 0.0250

As per the information given in the question we have

Intrinsic value of one call option = $ 0.0250

No. of Call option contracts = 62,500

Thus the Intrinsic value of one DM 62500 call option = No. of Call option contracts * Intrinsic value of one call option

= 62,500 * $ 0.0250

= $ 1,562.50

The Intrinsic value of one DM 62500 call option = $ 1,562.50