Consider the following equation: C = S - K + dis(K)+ P - PV(Div)
In this equation,dis(K)+ P - PV(Div)tells us:
A)the market value of the option.
B)the difference in the price of an American option over a European option because of dividend capture.
C)the intrinsic value of the option.
D)the time value of the option.

Question

Quizplus · Accepted Answer

dis(K)+ P - PV(Div) represents the price of an option that reflects the time value of the option. The intrinsic value of the option is only dependent on the difference between the strike price and the underlying asset price, whereas the time value is influenced by various factors such as time to expiration, volatility, and interest rates. Therefore, we can conclude that dis(K)+ P - PV(Div) represents the time value of the option.

Consider the Following Equation: C = S - K