Define and explain the logic for the time value of an option. Explain the value of the time value of an option for deep out-of-the money and deep in-the-money options
What will be an ideal response?
Answer: The time value of an option exists because the price of the underlying currency, the spot rate, can potentially move further and further into the money before the option's expiration. Time value is the area between the total value of the option and its intrinsic value. An investor will pay something today for an out-of-the-money option (i.e., zero intrinsic value) on the chance that the spot rate will move far enough before maturity to move the option in-the-money. Consequently, the price of an option is always somewhat greater than its intrinsic value, since there is always some chance — some might say 'hope everlasting' — that the intrinsic value will rise by the expiration date. For deep out-of-the money and deep in-the-money options the value of the time value of an option is insignificant since the chances for the option to increase in value are slim.
You might also like to view...
Which statement is true?
a. ERPs are infinitely scalable. b. Performance problems usually stem from technical problems, not business process reengineering. c. The better ERP can handle any problems an organization can have. d. ERP systems can be modified using bolt-on software.
Indicate the correct form of the verb in parentheses. We (present perfect tense of eat) there many times
Which of the following is enforceable without consideration?
a. A new promise to pay a debt barred by the statute of limitations. b. An illusory promise. c. A promise to supply all of the materials a manufacturer will need for the production of a certain item for a specified period of time. d. In the majority of states, a promise by a father to pay someone for rendering emergency services to his injured son before the father had arrived at the accident scene.
Statutes of repose places outer times limit on product liability actions
Indicate whether the statement is true or false