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Why do options sell at prices higher than their exercise values?
Describe between beta (or market) risk, within-company (or corporate) risk, and stand-alone risk for a potential project. Of these three measures, which is theoretically the most relevant, and why?
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The solution explains some finance questions relating to option prices higher than exercise value, market and corporate risk
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Why do options sell at prices higher than their exercise values?
Options sell at a price higher than the exercise value die to the time value of the option. An option provides a right but not the obligation. What this means is that the owner of the option may exercise the option if it is profitable but can let the option expire without using if it is not profitable. Thus an option enables the owner to limit the loss (which is the option premium) but amplify the profits by using the option. This protection which the option provides is the time value of the option and is the difference between the price of the option and the exercise value.
To understand with an example, let us say the exercise price of a call is $50 ...
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