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Partb iii the value of option prior to expiry consists of intrinsic value and time value of money if option is in the money ..please explain what is in the money option with refrence to this point
2) If the option is exercised before expiry daikon co will recieve only intrinsic value but not time value why?
3)And if options is sold instead ..the company will recieve higher value for it due to time value attached to it …are they talking about selling the options at expiry date if yes then why please explain all 3 points
The intrinsic value is the difference between the current share price and the exercise price.
However, the value of the option will usually be higher than this because it takes into account the fact that when it is exercised some time in the future, the share price then it likely to be higher – this extra is the time value.
If it is exercised sooner, then you are removing the chance of the share price increasing and therefore you just get the intrinsic value at the date of exercising.
If instead you sell the option, then the person buying it will pay for the time value as well.
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