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Understanding how different factors affect the value of options is the first step to understanding option pricing models. The following table shows how increases in
Understanding how different factors affect the value of options is the first step to understanding option pricing models. The following table shows how increases in the given factors on the left affect the value of a put option. For each factor, indicate whether an increase in its value causes the value of the put option to increase or to decrease. When is a call option considered to be out-of-the-money? When the exercise price is below the current stock price When the exercise price exceeds the current stock price Suppose Victor bought an option to buy the stock of Company X at an exercise price of $52.00 per share. The price of the option was $6.50 in April, and Company X's stock was trading at the price of $45.00 per share. Ashley bought a call option for the same company on the same day as Victor, but the exercise price of the option was $50.00 per share. If all other things are the same, the price that Ashley paid for the option would have been: Exactly $6.50 More than $6.50 Less than $6.50 Ashley paid this price because, as the exercise price increases, option buyers have to pay _______ money to acquire Company X's stock. Thus, all other things being equal, the higher the exercise price, the __________ call option's value
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