Chapter6 - Chapter Six The Black-Scholes Option Pricing...

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Chapter Six The Black-Scholes Option Pricing Model Answers to Problems and Questions 1. Interest rates may have changed, the expected amount of the next dividend may have changed, or the market may anticipate a different future level of volatility in the stock. Also, another day has passed, so the option has less time value. 2. Call premiums rise as interest rates go up. This can be explained by noticing that the “second half” of the BSOPM is discounted by the riskless interest rate. If you discount by a larger number, you get a smaller value. Because the second half of the model is subtracted from the first half, a larger discount rate means that the model will predict a higher option premium. 3. The option trader is more concerned about what will happen in the future than what has already occurred. Historical volatility deals with the past, while implied volatility gives an indication about the future. Implied volatility is probably more important in this respect, but the best answer to this question recognizes that implied volatility should be compared with historical volatility. If implied volatility is very high
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This note was uploaded on 01/31/2011 for the course ACCT 331 taught by Professor N/a during the Spring '10 term at Mountain State.

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Chapter6 - Chapter Six The Black-Scholes Option Pricing...

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