An American-Style Call Option with Six Months to Maturity Has

question 7

Multiple Choice

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the time value of the call?

• A) $8
• B) $12
• C) $0
• D) $4
• E) Cannot be determined without more information

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Definitions:

Net Present Value

A financial metric that calculates the difference between the present value of cash inflows and outflows over a period of time, used to assess the profitability of an investment.

Annual Cash Savings

The amount of money saved over the course of a year as a result of cost-cutting measures, efficiency improvements, or other savings opportunities.

Discount Rate

The interest rate used to discount future cash flows to their present value, thereby reflecting the time value of money.

Net Present Value

An approach used in capital budgeting to determine the profitability of an investment or project by calculating the difference between the present value of cash inflows and the present value of cash outflows over a period of time.