Finance And Investment Challenge Practice Test

What is the intrinsic value of a European call option with strike price $50 when the stock price is $60?

10 0 5 15

Correct Answer:

Explanation:

Intrinsic value is the immediate exercise payoff: max(S − K, 0). With the stock at 60 and the strike at 50, exercising now would yield 60 − 50 = 10, so the intrinsic value is 10. For a European call, this reflects what it would be worth if you could exercise today, even though it can only be exercised at expiration in reality; the option’s total price could be higher due to time value. The other numbers don’t match the immediate exercise payoff (they would correspond to different S and K scenarios).

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