The Intrinsic Value of an Option

question 50

Multiple Choice

The intrinsic value of an option

• A)is equal to the option premium.
• B)is the amount the option actually is worth if it is immediately exercised.
• C)is the amount the option is expected to be worth on its expiration date.
• D)is impossible to determine in the absence of information on the future prices of the underlying asset.

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Definitions:

Variable Cost

Costs that change in proportion to the goods or services that a business produces.

Net Present Value

A method used in capital budgeting to evaluate the profitability of an investment by summing the present values of all cash inflows and outflows associated with the investment.

Tax Credit

A direct reduction of the tax liability, not merely a reduction of taxable income.

Variable Cost

Expenses that change in proportion to the activity of a business, such as costs for raw materials or production inputs, which vary with the level of output.