For an American call option, A and B in the graph are
A)time value and intrinsic value.
B)intrinsic value and time value.
C)in-the-money and out-of-the money.
D)none of the above

Question

For an American call option, A and B in the graph are 
A)time value and intrinsic value. 
B)intrinsic value and time value. 
C)in-the-money and out-of-the money. 
D)none of the above

Quizplus · Accepted Answer

The x-axis on the graph represents the underlying asset price, while the y-axis represents the option price. The intrinsic value is the difference between the underlying asset price and the strike price, multiplied by the number of shares in the contract. This means that the intrinsic value is positive when the underlying asset price is above the strike price, and zero when it is below. In this graph, the intrinsic value is represented by the flat line at $5. The time value is the difference between the option price and the intrinsic value, and it represents the likelihood that the underlying asset price will move further in the money before the option expires. In this graph, the time value is represented by the curved line above the intrinsic value line. Therefore, A is incorrect and B is correct. C and D are irrelevant to this graph.

For an American Call Option, a and B in the Graph