calls Strike Premium Strike premium 82.5 5.75 82.5 1.05 85 4 85 1.40 87.5 2.45 8
ID: 2724265 • Letter: C
Question
calls
Strike
Premium
Strike
premium
82.5
5.75
82.5
1.05
85
4
85
1.40
87.5
2.45
87.5
2.85
90
1.40
90
5.30
92.5
.70
92.5
8.15
95
0.32
95
12.65
7. From the table above, calculate the intrinsic value and the time value of the following options: a. 82.5 Call b. 85 Call c. 87.5 Call d. 82.5 Put e. 92.5 Put 8. Consider the following annual bond: Coupon rate: 6.5% YTM: 7.5% Time: 30 years a. Calculate the duration of this bond. b. A bond is initially immunized at the point of duration. Show that immunization occurs (interest rate risk and reinvestment rate risk offset) at the point of duration. Use these interest rates: 7%, 7.5%, 8%.
calls
Strike
Premium
Strike
premium
82.5
5.75
82.5
1.05
85
4
85
1.40
87.5
2.45
87.5
2.85
90
1.40
90
5.30
92.5
.70
92.5
8.15
95
0.32
95
12.65
Explanation / Answer
Intrinsic value = max ( Stock price – strike price , 0)
Time value = option premium – intrinsic value
Part a) 82.50 call
Intrinsic value = 85-82.50
= 2.50
Time value = 5.75-2.50
=3.25
Part b) 85 call
Intrinsic value = 85-85
= 0
Time value = 4-0
=4
Part c) 87.50 call
Intrinsic value = max( 85-87.50,0)
= 0
Time value = 2.45-0
=2.45
Part d) 85 put
Intrinsic value = max (82.50 – 85, 0)
= 0
Time value = 1.05 -0
=1.05
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