Canadian Securities Course (CSC) Level 1 Practice Exam

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What is Intrinsic Value?

Equities.
Energy products.
Grains and oil seeds.
The value of certainty aka the portion of the option contract that is ITM.

The correct answer is: The value of certainty aka the portion of the option contract that is ITM.

Intrinsic value refers to the inherent worth of an asset, which can often be expressed in the context of options trading. For options specifically, intrinsic value is defined as the amount by which an option is in-the-money (ITM). In other words, it represents the difference between the underlying asset's current market price and the option's strike price, provided this difference is positive. If the option is not ITM, its intrinsic value is considered to be zero. This definition directly links to the concept of certainty in the investment's potential outcomes. Investors often evaluate options based on their intrinsic value to determine the minimum return they can expect if they choose to exercise the option. Understanding intrinsic value is crucial for traders as it assists them in making informed decisions regarding option pricing and potential profitability. The other options presented do not relate to the specific financial concept of intrinsic value in the context of options, which is why they are not considered correct.