Which of the Following Is Correct Regarding a Call Option

question 16

Multiple Choice

Which of the following is correct regarding a call option?

• A)The intrinsic value of a call option is the greater of zero and (K- S), the difference between the market price and the strike price.
• B)The time value of an option reflects the probability that the future market price of the underlying instrument will not exceed the strike price.
• C)The time value decreases with the length of time to expiration and the volatility of the underlying instrument (such as the share price).
• D)The time value is always positive until the option expires, so the total value of an unexpired option is always greater than the intrinsic value.

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Definitions:

Endowment Effect

A cognitive bias where people ascribe more value to things merely because they own them.

Gains

The increase in economic benefit, which can be measured in terms of profit, utility, or welfare, resulting from an action or transaction.

Losses

The financial deficit arising when the cost of producing and operating exceeds the revenue generated.

Prospect Theory

A theory in behavioral economics that evaluates how people choose between probabilistic alternatives that involve risk, focusing on the psychology of decision-making.