Explanation:
The value of a call option decreases as the exercise price increases, and it generally decreases as the time to expiration decreases. Both Call B and Call C are significantly out-of-the-money (current market price is USD 20). Call B has a very short time to expiration (8 months) compared to Call A (36 months) and Call C (22 months), and also has a high exercise price. The extremely short time to expiration combined with being deeply out-of-the-money makes it highly likely that Call B has the lowest premium.
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Q.72 James Porter is analyzing in the following option contracts on a security with a current market price of USD 20:
Exhibit: Option Contracts
| Call Options | Exercise Price | Time to Expiration |
|---|---|---|
| A | USD 25 | 36 months |
| B | USD 29 | 8 months |
| C | USD 30 | 22 months |
Which of the above option contracts is more likely to have the lowest premium?
A
Call A
B
Call B
C
Call C
D
Either Call A or Call B