i) Explain the term intrinsic value of an option. (1 mark)
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Intrinsic value in an option is explained as the positive value or gain if an option is exercised today. Technically, the option will be so considered to be in the money. An option has an intrinsic value when it is in-the-money.
ii) DUU Ghana Ltd bought USD/GH¢ call options from KASA Ltd. The table below shows the various spot rates and strike prices for the various tenors.
Required:
Determine the intrinsic value of the option for each trading month and clearly indicate the months in which the option is in-the-money, at-the-money or out-of-the-money. (6 marks)
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DUU ltd was in the money for 1 to month 3, at the money in month 4 and out of the money in month 5 and 6.