Thus it follows that the expected option value is

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Unformatted text preview: Finance Options Option value Option value Share price Share price For both stocks there is a 50% probability that the stock price exceeds the exercise price, which implies that the option value is positive. However, for the option to the right the probability of observing large positive option values is significantly higher compared to the option to the left. Thus, it follows that the expected option value is increasing in the underlying stock price volatility. 4. Time to option expiration If volatility in the underlying stock price is positively related to option value and volatility, 2, is measured per period, it follows that the cumulative volatility over t sub periods is t· 2. Thus, option value is positively related to the time to expiration. 5. Discount rate If the discount rate increases the present value of the exercise price decreases. Everything else equal, the option value increases when the present value of the exercise price decreases. 9.3 Option pricing As with all finan...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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