Canadian Securities Course (CSC) Level 1 Practice Exam

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How do you calculate IV?

Price of underlying security - Strike Price
Strike price - Price of underlying security
Divide Strike Price by Price of underlying security
Add Strike Price and Price of underlying security

The correct answer is: Strike price - Price of underlying security

The correct way to calculate IV (Intrinsic Value) is by subtracting the Price of the underlying security by the Strike Price. This calculation helps determine the inherent value of an option by considering how much it is "in-the-money" based on the current market price of the underlying security. Option A is incorrect as it subtracts the Strike Price from the Price of the underlying security, which would not provide the Intrinsic Value. Option C is incorrect as it suggests dividing the Strike Price by the Price of the underlying security, which is not the correct calculation for IV. Option D is incorrect as it recommends adding the Strike Price and Price of the underlying security, which is not the calculation used to determine IV.