Why should I choose AnalystNotes?
AnalystNotes specializes in helping candidates pass. Period.
Basic Question 5 of 11
The maximum value of a call is equal to ______.
B. the exercise price times one plus the risk-free return
C. the price of the stock
A. the price of the stock minus the exercise price
B. the exercise price times one plus the risk-free return
C. the price of the stock
User Contributed Comments 15
| User | Comment |
|---|---|
| Aimy | Isn't it S-X? |
| gruszewski | maybe they assume the minimum strike = 0 --> max possible value = underlying |
| synner | S-X = intrinsic value? |
| tengo | it seems logical to S-X, but if the stike is zero then the maximun value of the expression is S since negative strikes are not allowed |
| 0is4eva | "The MAXIMUM value of a CALL is the current value of the underlying. A call is a means of buying the underlying. It would not make sense to pay more fo the right to buy the underlying than the value of the underlying itself." "For a PUT, it makes a difference whether the put is European or American. One way to see the maximum value for puts is to consider the best possible outcome for the put holder. The best outcome is that the underlying goes to a value of zero. Then the put holder could sell a worthless asset for X." The MINIMUM lower bound of an American option: CALL >= Max(0, S-X) __/ PUT >= Max(0, X-S) The value of an American option will be at least its intrinsi value due to arbitrage. |
| Rotigga | What kind of person would be crazy enough sell a call option at a $0 strike price? |
| danrow | It makes sense what 0is4eva said, who is going to buy a call that is more expensive than the underlying?? If it was equal the profit would be zero. |
| danrow | Also, when you exercise the call option, you do not get S-X... you actually get S-C (C= the value of the call) |
| studyprep | By the way this question is not asking about the intrinsic value = (S - X), which you pay when you buy the option. But overall/maximum cost that you could be incurred = intrinsic value that you paid when you bought the option + strike price. And that would be maximum you pay = the price of the stock at the time when you bought the stock. What is the pay off then? Your payoff is the difference between current strike price and what you overall paid. Example: Suppose current stock price = $25, strike price = $20, Then you would like to pay for the call option now = (25 - 20) = $5. Lets say in future price of the underlying security = $100 (Now Important ) Overall/Maximum you would pay = $25. Where as your payoff = $75 option |
| yael | The maximum value of a call or put option could be any value between zero and the difference between the underlying price and exercise price. By establishing lower bounds, we are able to tighten the range so that at expiration, the minimum value of a call and a put is zero. The maximum value of a call option is: max (0, underlying price - exercise price). The maximum value of a put option is max (0, exercise price - underlying price). |
| viannie | Max value of a call option = current value of the underlying. It won't make sense to buy the right to buy the asset at a price higher than the value of the underlying. (P100 - 101) Pay-off values of call option = between zero to (S-X) So one is max value of the option one would pay for and the other is the max pay-off value at expiration. |
| CJPerugini | Value is different than price. For a call option the value is equal to it's option premium, which is the amount a buyer is willing to pay over the exercise price. |
| fabsan | Theorically the maximum value of a Call is infinite minus the strike price. That should be equal to infinite still. This theory hold because we assume that the stock price can rise to infinite. |
| Inaganti6 | A is right if asked for payoff or intrinsic.... C is right for value which asks for absolute upper value..... Gotta read these questions carefully. |
| Samir3112 | If the Price of the Call option is greater than the underlying, then he can go short on the call option and long on the underlying to create an arbitrage opportunity , when the option is in money. |
I was very pleased with your notes and question bank. I especially like the mock exams because it helped to pull everything together.
Martin Rockenfeldt
Learning Outcome Statements
explain the exercise value, moneyness, and time value of an option
CFA® 2024 Level I Curriculum, Volume 5, Module 8.