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Question 14.19: Suppose that the price of the underlying is $40 and that the...

Suppose that the price of the underlying is $40 and that the option price is $5.
a. If the exercise price for a put option is $42, what are the intrinsic value and the time premium for this option?
b. If the exercise price for a call option is $50, what are the intrinsic value and the time premium for this option?

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a. intrinsic value = $42 − 40 = $2; time value = $5 − 2 = $3
b. intrinsic value = $40 − 50=−$10→$0; time value = $5 − 0 = $5

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