A stock that pays no dividends has a price of $40. If the interest rate is zero, then which if the following statements is valid?
A) The three-month call is worth less than the two-month call.
B) The time value of the three-month call is the same as that of the two-month call.
C) The insurance value of the three-month call is the same as that of the two-month call.
D) The intrinsic value of the three-month call is less than that of the two-month call.

Question

Quizplus · Accepted Answer

Since the interest rate is zero, the time value of money is also zero. Therefore, the time value of the two-month call and the three-month call is the same. Option A and D are incorrect because the length of the option does not impact the option's intrinsic value, which depends on the stock price and the strike price. Option C is incorrect because the insurance value of an option is the same regardless of the option's maturity.

A Stock That Pays No Dividends Has a Price of $40