Derivatives - cost of holding asset and benefit of holding asset - influence time value or intrinsic value of option?

CFA Level I Derivatives
#1

Hi,

I was wondering whether the cost of holding the underlying asset and the benefit of holding the underlying asset impacts the time value of the assets or its intrinsic value?

Thanks

#2

Yes, they do.

#3

Hi S2000magician,

Do you mean that they are affecting both the time value and the instrinsic value of an option? Aren’t they only influency one of these aspects? thanks

#4

I would bet that they primarily affect the intrinsic value, since costs or benefits of holding the underlying affect directly the spot price which in turn is computed in the intrinsic value formula (max of zero and moneyness). Time value refers to the volatilty of the underlying and time to expiration.

#5

As EnricB says, the direct effect is on the intrinsic value: you have to subtract the costs and add the benefits.

The effect on the time value is indirect: because the intrinsic value is different, the time value will be slightly different. Probably not enough to matter.

#6

thanks guys!