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In part b theory its given option consists of time value of money and intrinsic value before expiry. If option is exercised daikon will recieve only intrinsic value not time value and if option is sold whether in the money or out of money daikon will recieve higher value.unless options have other features like dividends they would normally be exercised prior to expiry
Please explain this part with concepts of intrinsic value in the money and out of money options and why would an option be sold gives higher value plis dividend part thanks
It is more easily understood if you think about share options (although the same thinking applies to all options).
Suppose you hold an option to buy shares for $2 per share, exercisable at any time during the next 3 years, and the current share price is $3 per share.
If you exercise it today then you will gain $1 per share.
However, if you were instead to sell the option today you will get more than $1 per share. The reason for this is that the person buying is will then still have the option to buy a share at a later date for $2 per share, and there is a chance that the price will increase to more than $3 per share in the future. This extra amount that it will be worth is the time value and is dealt with the Black Scholes formula.
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