Suppose it is May 1998 and the current spot rate for the DM is $0.5925.The call premium on a call option with an exercise price of $0.5675 is $0.0373.What is the time value of one DM 62,500 call option?
A)$2,331.25
B)$1,562.50
C)$950.00
D)$768.75

Question

Quizplus · Accepted Answer

The time value of an option is calculated by subtracting the intrinsic value from the total premium. The intrinsic value is the difference between the spot rate and the exercise price, if the option is in the money. Here, the intrinsic value per DM is $0.5925 - $0.5675 = $0.025. For a DM 62,500 call option, the intrinsic value is $0.025 * 62,500 = $1,562.50. The total premium for the option is $0.0373 * 62,500 = $2,331.25. Therefore, the time value is $2,331.25 - $1,562.50 = $768.75.

Suppose It Is May 1998 and the Current Spot Rate