A stock is currently selling for $22.00 per share.Ignoring interest,determine the intrinsic value of a call option should there exist equally probable stock prices of $25.00 and $23.00.
A) $0.00
B) $1.00
C) $2.00
D) $3.00

Question

Quizplus · Accepted Answer

The intrinsic value of a call option is calculated as the average of the possible outcomes, minus the current stock price, when those outcomes are above the strike price. Here, the outcomes are $25.00 and $23.00, so the average is $(25 + 23) / 2 = $24.00. Since the current stock price is $22.00, the intrinsic value is $24.00 - $22.00 = $2.00.

A Stock Is Currently Selling for $22