John and Randy form a company with assets worth $900. They each have four shares of stock. Randy gives Cheri a call option on one share of stock. The option has an exercise price of $100 and expires in one year. In one year, the firm's assets are worth $1,000 and Cheri exercises the option. What is the intrinsic value of the option at maturity?

Question

Quizplus · Accepted Answer

The intrinsic value of an option at maturity is the difference between the asset's price at maturity and the exercise price of the option, if this difference is positive; otherwise, it's $0. Here, the firm's assets are worth $1,000, and there are 8 shares in total, making each share worth $125 ($1,000 / 8 shares). Since the exercise price is $100, the intrinsic value of the option is $25 ($125 - $100).

John and Randy Form a Company with Assets Worth $900