The Intrinsic Value of an Option

question 7

Multiple Choice

The intrinsic value of an option:

• A) is the amount the investor believes the option will be worth on the expiration date.
• B) is the amount the option is worth if it is exercised immediately.
• C) is equal to price of the underlying asset.
• D) cannot be determined without knowing the future price of the underlying asset.

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Definitions:

Equilibrium Price

The market price at which the quantity of goods supplied is equal to the quantity of goods demanded, also known as the market-clearing price.

Supply and Demand Functions

Mathematical expressions that describe the relationship between the supply of and demand for goods or services within a market.

Pareto Optimal

A distribution of resources from which it is impossible to reallocate in a way that makes at least one individual better off without making anyone worse off; it constitutes an efficient allocation of resources.

Marginal Rate

A measure of the rate of change in a variable as another variable changes incrementally, often used in the context of taxes or utility.