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“If an option is exercised prior to expiry, Daikon Co will only receive the intrinsic value attached to the option but not the time value. If the option is sold instead, whether it is in-the-money or out-of-money, Daikon Co will receive a higher value for it due to the time value.”
sir i do not understand the above sentence.
If an option is exercised (whether before or at expiry) then the benefit is the difference between the exercise price and the actual value of the assets at the time it is exercised (the intrinsic value).
If an option is sold before expiry then the value of the option is determined by the Black Scholes formula which take into account the fact that by the time it is actually exercised the potential benefit at that time will be higher due to the uncertainty over the remaining period. So the option will have a higher value.
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