Pricing and Valuation of Options
Free CFA Level I lesson in Derivatives. 12 min read, ~1,791 words.
Exercise (intrinsic) value = max(0, S−X) for calls, max(0, X−S) for puts. Never negative; the zero floor always applies. Option premium = exercise value + time value. Time value is non-negative and decays to zero at expiration. Moneyness: ITM = positive exercise value, ATM = S ≈ X, OTM =...
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What this lesson covers
- Content
- Example 1
- Example 2
- Common Mistakes
- Check Your Understanding
- Exam Shortcuts
Learning objectives
- pricing and valuation of options
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