The stock price is $34. The strike price of a three-month European call option is $32. If the call option is priced at $5, and the risk-free rate of interest is 2%, and the stock pays a dividend of $1 in one month, then the time value of the option is
A) 1.16
B) 2.16
C) 3.16
D) 4.16

Question

Quizplus · Accepted Answer

The time value of the option is the difference between the option price and the intrinsic value. The intrinsic value is the difference between the stock price and the strike price. In this case, the intrinsic value is $34 - $32 = $2. The time value of the option is $5 - $2 = $3.

The Stock Price Is $34