Sam Is Considering Purchasing a Call Option on ABC Stock

question 26

Multiple Choice

Sam is considering purchasing a call option on ABC stock. The call has a premium of $3, an exercise price of $50, and ABC is trading at $51 per share. Which of the following statements about the call option is correct?

• A) The call has an intrinsic value of $1 and a time value of $2.
• B) The call has an intrinsic value of $0 and a time value of $3.
• C) The call has an intrinsic value of $3 and a time value of $2.
• D) The call has an intrinsic value of $0 and a time value of $1.

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Definitions:

Chi-Squared Variable

A variable that follows the chi-squared distribution, typically used in tests of independence and goodness-of-fit.

Degrees of Freedom

The sum of independent quantities or values able to be set for a statistical distribution.

Population Variances

A measure of the variance within an entire population, indicating the average of the squared differences from the mean.

Test Statistic

A standardized value calculated from sample data during a hypothesis test; used to decide whether to reject the null hypothesis.