The Divergence Between an Option's Intrinsic Value and Its Market

question 78

Multiple Choice

The divergence between an option's intrinsic value and its market value is usually greatest when ________.

• A) the option is deep in the money
• B) the option is approximately at the money
• C) the option is far out of the money
• D) time to expiration is very low

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Definitions:

EBIT

Earnings Before Interest and Taxes, a measure of a firm's profit that includes all expenses except interest and income tax expenses.

Interest

The charge for borrowing money or the return on invested capital, typically expressed as an annual percentage rate.

EBITDA Coverage Ratio

A financial metric that assesses a company's ability to pay off its debts, calculated by dividing EBITDA by total debt service costs.

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization, a measure of a company's operating performance.