Recalculate the value of the call option in Problem 11, successively substituting one of the changes below
Question:
a. Time to expiration = 3 months.
b. Standard deviation = 25% per year.
c. Exercise price = $55.
d. Stock price = $55.
e. Interest rate = 5%.
Consider each scenario independently. Confirm that the option value changes in accordance with the prediction ofTable.
If This Variable Increases Stock price, S Exercise price, X Volatility, σ Time to expiration, T Interest rate, rf Dividend payouts The Value of a Call Option Increases Decreases Increases Increases Increases Decreases
Step by Step Answer:
a C falls to 51443 ...View the full answer
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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