Final answer:
Before expiration, the time value of a call option is the actual call price minus the intrinsic value of the call option. Intrinsic value is determined by the positive difference between the underlying asset's price and the option's strike price, and time value reflects the potential for an increase in value due to various market factors.
Step-by-step explanation:
The question relates to the concept of option pricing in finance. Before expiration, the time value of a call option is equal to the actual call price minus the intrinsic value of the call. The intrinsic value of an option is the difference between the underlying stock's current price and the strike price of the option, but only when this is positive. The time value represents the additional value that traders are willing to pay for the possibility that the option may gain in value before expiration due to changes in the volatility of the underlying asset, interest rates, dividends, or the time remaining until expiration.
To calculate the time value of a call option:
- Determine the current price of the underlying asset.
- Calculate the intrinsic value by subtracting the option's strike price from the current price of the asset. If this value is negative, the intrinsic value is zero.
- Determine the actual call price in the market.
- Subtract the intrinsic value from the actual call price to get the time value of the option.