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

Answer 1

The time value of a call option is the excess premium amount over the intrinsic value of the call option

The Intrinsic Value of the Call Option = Number of call options x (Current Spot Rate – Exercise Price)

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

= 62,500 call option x $0.0250

= $1,562.50

Premium on Call Option = Number of call options x Premium per call option

= 62,500 call option x $0.0373

= $2,331.25

Therefore, the Value of the Call Option = Premium on Call Option - The Intrinsic Value of the Call Option

= $2,331.25 - $1,562.50

= $768.75

“Hence, the Value of the Call Option would be $768.75”