Question

You are given the following information concerning options on a particular stock:

  

Stock price	=	$62
Exercise price	=	$60
Risk-free rate	=	5% per year, compounded continuously
Maturity	=	3 months
Standard deviation	=	45% per year

  

a.	What is the intrinsic value of each option? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations.)

   

	Value
Call option	$
Put option	$

  

b.	What is the time value of each option? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

	Value
Call option	$
Put option

Answer 1

Answer : Calulation of Option premium of call option

Formual used:- C = MAX [0, S-X/E^RT]

Here , S = 62$ , X = 60$ , T = 3 months, R= 5% c.c. & C = Option premium

C = MAX [ 0,62$ - 60$/e^0.05*3/12 ]

C = MAX[62 $ - 60$ *e^0.0125]

C = MAX[62$ - 60 * 1.01257]

C = MAX[ 62$ - 60.7547]

C = 1.2453 $

Calulation of Option premium of Put option

Formual used:- C = MAX [0, X/E^RT-S]

Here , S = 62$ , X = 60$ , T = 3 months, R= 5% c.c. & C = Option premium

C = MAX [ 0,60$/e^rt - 62$ ]

C = MAX[ 60$/e^0.05*3/12 - 62$]

C = 0

b) Calculation of Intrinsic value in call option

Formual used:- C = MAX [0, S-X]

Here , S = 62$ , X = 60$ & C =Intrinsic Value

C = MAX [ 0,62$ - 60$ ]

C = 2$  

Calculation of Intrinsic value in Put option

Formual used:- C = MAX [0, X-S]

Here , S = 62$ , X = 60$ & C =Intrinsic Value

C = MAX [ 0,60$ - 62$ ]

C = 0

a) Calculation of Time value in call option

Formula used :- Option Premium - Intrinsic Value

Here , Option Premium is = 1.2453$ & Intrinsic Value is = 2 $

Time value = 1.2453$ -2$ = 0

Calculation of Time value in put option

Formula used :- Option Premium - Intrinsic Value

Here , Option Premium is = 0 & Intrinsic Value is =0

Time value = 0