BSOP requirement a,
Sir in my text book it was written that value of option is made up of 2 thing
1) intrinsic value
2) time value
and intrinsic value is calculated by comparing Pa-Pe
In this question Pa is $23.128 and Pe is $24 so the intrinsic value shouldn't be "Nil"
But in the answer it was written the value of option $5.95m is made up of intrinsic value of $4m and time value of $1.95m
Can you explain me this with a proper reason to understand???
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Digunder ( Dec 07)
7y ago#1Pa is $28. I don't know where you are getting $23.128 from.
Have you watched by free lectures on option pricing and on real options?
Actually question is related to delay the decision for 2 year
before delaying the decision Pa was $28m but after delaying for 2 year Pa was $23.128m or $23.13m
this is why i m confused, which one i should use when calculating intrinsic value??
(Note this was not part of the original requirement, i m just asking to clear my concept)
7y ago#3Pa is 28M. If they wait 2 years then it is still 28M that will be paid.
The exam has never asked for any mention of the intrinsic value, even though it is Pa - Pe.
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