Question

Suppose 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.

1. What is the intrinsic value of one DM 62,500 call option?

2. What is the time value of one DM 62,500 call option?

Answer 1

Intrinsic Value of a call option

Intrinsic Value of a call option is equal to the underlying price minus the strike price.

Intrinsic Value = Underlying Price – Strike Price

Time Value of a call option

Time Value of a call option is the difference between the call premium the Intrinsic value

Time Value of a call option = Call Premium – Intrinsic Value

(a)-The Intrinsic Value of one DM 62,500 call option

Intrinsic Value of one DM 62,500 call option = (Current Spot Rate – Exercise Price) x 62,500

= ($0.5925 - $0.5675) x 62,500

= $0.0250 x 62,500

= $1,562.50

“The Intrinsic Value of one DM 62,500 call option = $1,562.50”

(b)- The time value of one DM 62,500 call option

Time value of one DM 62,500 call option = Premium on Call Option - Intrinsic Value of one DM 62,500 call option

= ($0.0373 x 62,500) - $1,562.50

= $2,331.25 - $1,562.50

= $768.75