INTRODUCTION
Jaclyn Grimshaw, the manager of billion-dollar hedge funds wants to make bid to acquire
RAMSync Incorporated.For this very reason, she wants to make some predictions and calculations to decide whether toacquire RAMSync or not.
- INTRINSIC VALUE OF OPTION
Intrinsic value of an option is actually the worth of an option at the time of expiration. The investors calculate intrinsic value to determine whether the asset or business they hold is overvalued or undervalued. It is different for different option holders.
INTRINSIC VALUE FOR CALL OPTION
Intrinsic value of call option is actually the worth of the option for its holder. For example, if a person buys call option at $30 and the stock price at the expiration rise to $40, then $10 will be the intrinsic value of the call option and this will be in-the-money situation for the option holder.
However,if the price of stock declines to $15 at the time of expiration, then the intrinsic value of option will be -$15 and the situation will be out-of-money for the option holder. In this case, it will be a loss for the option holder in exercising the option. So, the buyer and seller can dissolve the option by mutual consent.
However, if the stock price and strike price become equal, then this situation is called At-the-money.
RAM Sync Harvard Case Solution & Analysis
INTRINSIC VALUE FOR PUT OPTION
Intrinsic value of put option is the worth of put option for holder at the time of expiration. Considering the above example of call option, in case of increasing stock price than $30 value of option, it will be out-of-money situation for the holder of put option because he can sell shares at high price in the market. Similarly, if the stock price decreases, then it will be beneficial for the put option holder and hence will be in-the-money situation for him.
| Intrinsic Value of Call OptionJun,04 Sept,04 Dec,04 | |||
| $20.00 | $5.79 | $5.79 | $5.79 |
| $22.50 | $3.29 | $3.29 | $3.29 |
| $25.00 | $0.79 | $0.79 | $0.79 |
| $27.50 | ($1.71) | ($1.71) | ($1.71) |
| $30.00 | ($4.21) | ($4.21) | ($4.21) |
In this case, the greatest intrinsic value i.e. $5.79for call option in-the-money is at the strike price of $20.
| Intrinsic Value of Put Option | June,04 | Sep,04 | Dec,04 |
| $20.00 | ($5.79) | ($5.79) | ($5.79) |
| $22.50 | ($3.29) | ($3.29) | ($3.29) |
| $25.00 | ($0.79) | ($0.79) | ($0.79) |
| $27.50 | $1.71 | $1.71 | $1.71 |
| $30.00 | $4.21 | $4.21 | $4.21 |
For call option, the greatest intrinsic value i.e. $4.21 is at the strike price of $30.
TIME VALUE OF STOCK
Time value of the option is basically premium less intrinsic value of the option.
As we approach to the increasing maturity, the time value is also increasing.
| Time Value of Call Option | |||
| $20.00 | $0.09 | $1.37 | $2.44 |
| $22.50 | $0.32 | $2.24 | $3.51 |
| $25.00 | $1.06 | $3.41 | $4.80 |
| $27.50 | $2.48 | $4.85 | $6.29 |
| $30.00 | $4.47 | $6.53 | $7.95 |
In the case of call option, the greatest time value is at the strike price of $30 given that maturity is at Dec, 04.
| Time Value of Put Option | |||
| $20.00 | $5.83 | $6.80 | $7.58 |
| $22.50 | $3.32 | $5.13 | $6.07 |
| $25.00 | $1.78 | $3.75 | $4.78 |
| $27.50 | $0.70 | $2.65 | $3.69 |
| $30.00 | $0.18 | $1.79 | $2.77 |
For the put option, time value is also increasing with the increase in maturity. In the above table, we can see that the time value is higher at the strike price of $20 in Dec, 04............
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