Fundamental or intrinsic value, Finance Basics

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Fundamental or intrinsic value

Problem:

Calculate the call option value at the end of one period for a European call option with the following terms:

- The current price of the underlying asset = $80.

- The strike price = $75

- The one period, risk-free rate = 10%

- The price of the asset can go up or down 10% at the end of one period.

Required:

Question 1: What is the fundamental or intrinsic value?

Question 2: What is the time premium?

Note: Please show how to work it out.

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Finance Basics: Fundamental or intrinsic value

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Finance Basics: Fundamental or intrinsic value

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