The difference between the exercise price and the underlying asset price is called the:

A) option profit
B) option value
C) immediate value
D) none of these options

Question

The difference between the exercise price and the underlying asset price is called the:

A) option profit
B) option value
C) immediate value
D) none of these options

Quizplus · Accepted Answer

Expiry pay-off diagrams highlight the importance of the difference between the exercise price and the underlying asset price.This difference is often called the intrinsic value of the option.If the option were exercised immediately,the intrinsic value is the pay-off that would be generated by the option.In the case of the call option,the intrinsic value is the greater of two possibilities,zero or the underlying asset price less the exercise price.For put options,the intrinsic value is the greater of zero or the exercise price less the underlying asset price.The remainder of the option premium is called the time value of the option.

The Difference Between the Exercise Price and the Underlying Asset