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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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- Spring '08