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Question 3 Explain why an options time value is greatest when the stock price is near the exercise price and why it nearly disappears when

Question 3

Explain why an options time value is greatest when the stock price is near the exercise price and why it nearly disappears when the option is deep-in- or out-of- the-money. (5Marks)

Callpricesaredirectlyrelatedtothestocksvolatility,yethighervolatilitymeansthat the stock price can go lower. How would you resolve this apparent paradox? (5 Marks)

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