fm9 11 - can climb. 4. As the risk-free rate increases, the...

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Mini Case: 9 - 11 e. What impact does each of the following call option parameters have on the value of a call option? 1. Current Stock Price 2. Strike Price 3. Option’s Term To Maturity 4. Risk-Free Rate 5. Variability Of The Stock Price Answer: 1. The value of a call option increases (decreases) as the current stock price increases (decreases). 2. As the strike price of the option increases (decreases), the value of the option decreases (increases). 3. As the expiration date of the option is lengthened, the value of the option increases. This is because the value of the option depends on the chance of a stock price increase, and the longer the option period, the higher the stock price
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Unformatted text preview: can climb. 4. As the risk-free rate increases, the value of the option tends to increase as well. Since increases in the risk-free rate tend to decrease the present value of the option's strike price, they also tend to increase the current value of the option. 5. The greater the variance in the underlying stock price, the greater the possibility that the stock's price will exceed the strike price of the option; thus, the more valuable the option will be. f. What is put-call parity? Answer: Put-call parity specifies the relationship between puts, calls, and the underlying stock price that must hold to prevent arbitrage: Put + Stock = Call + PV of Strike Price...
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