North Shore Railroad operates between Chicago and upper Michigan and Wisconsin. Dallas Ingold, purchasing manager of North Shore Railroad, anticipates the price of diesel fuel will increase over the next few months. On September 4th, Ingold purchased an out-of-the-money November call option for $1,100. The option has a notional amount of 80,000 barrels and a strike price of $2.16 per barrel. Diesel fuel spot rates and option values at selected dates follow:
Spot Rate Option
Date per Barrel Value
September 30 $2.17 $1,130
October 31 2.13 1,026
November 27 2.19 2,400
a. For each of the above dates, calculate the intrinsic value and the time value of the option.
b. How much is the Intrinsic Value on September 4th.