Question

For Tesla stock, spot and forward rates for all periods are $280 per share.

A call on Tesla with a Strike = $300 per share and Expiring in 3 months is much more expensive than a call with the same strike ($300) expiring in 2 years.

True

False

Answer 1

Answer: False

Explanation: The premium of an Option consist of two components. Intrinsic Value and Time value.

Intrinsic value for call option = (Spot Price - Strike Price) in this case Spot is less than Strike so Intrinsic value for both the options will be ZERO

Time value is considered with reference with time to expiry. Far the expiry higher will be time value.

In this case Call Option having Expiry of 2 Years will be having higher time value Than call option having expiry after 3 months so Option with 2 Years Expiry will be much more expensive than option expiring in 3 Months.