Solved: Intrinsic value versus time value, Financial Accounting

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Intrinsic value versus time value

Response to the following problem:

You have taken a long position in a call option on IBM common stock. The option has an exercise price of $136 and IBM's stock currently trades at $140. The option premium is $5 per contract.

a. What is your net profit on the option if IBM's stock price increases to $150 at expiration of the option and you exercise the option?

b. How much of the option premium is due to intrinsic value versus time value?

c. What is your net profit if IBM's stock price decreases to $130?

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Financial Accounting: Intrinsic value versus time value

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Financial Accounting: Intrinsic value versus time value

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