The price of a stock is $61 and a call option with a strike price of $60 sells for $5 (i.e.,
the option premium is $5.). *SHOW WORK*
(a) What is the option’s intrinsic value?
(b) What is the option’s time premium?
(c) You purchased the call for $5. If, at the expiration of the call, the price
of the stock is $66, what is the profit (or loss) from buying the call?
(d) You purchased the call for $5. If, at the expiration of the call, the price
of the stock is $46, what is the profit (or loss) from buying the call?
(A)Intrinsic Value = Price of Stock – Strike Price
= $61-$60
= $1
(b)Time premium = Option Premium – Intrinsic Value
= $5-$1
= $4
(c)Call Option is the right to buy a share at a specified price in future
Since the market price is higher than the strike price, option will be exercised
Profit/Loss = 66-60 – 5
= $1
(d) Since the market price is lower than the strike price, the option will not be exercised (it is better to buy the stock from the market)
Hence, profit/loss is equal to the premium paid
= -$5
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