University of Central Florida (UCF) FIN4243 Debt and Money Markets Practice Exam 1

Question: 1 / 400

Intrinsic value measures what aspect of an option?

The potential future value of the option

The current profit if exercised now

Intrinsic value specifically refers to the current profit that an option holder would realize if they were to exercise the option at that moment. For a call option, this is calculated as the difference between the current price of the underlying asset and the strike price, provided this difference is positive. For a put option, the intrinsic value is the strike price minus the current price of the underlying asset, again focusing on the positive difference. Therefore, intrinsic value gives a snapshot of the option's immediate profitability based on current market conditions.

Other options reflect different concepts: potential future value refers to projections that are not current, the market price of the option represents what it trades for in the market, and total payout under the contract can capture both intrinsic and time value but does not specifically define intrinsic value itself.

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The market price of the option

The total payout under the given contract

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