A call option is the right to buy stock at $50 a share. Currently the option has
Question:
A call option is the right to buy stock at $50 a share. Currently the option has six months to expiration, the volatility of the stock (standard deviation) is 0.30, and the rate of interest is 10 percent (0.1 in Exhibit 20.2).
a) What is the value of the option according to the Black-Scholes model if the price of the stock is $45, $50, or $55?
b) What is the value of the option when the price of the stock is $50 and the option expires in six months, three months, or one month?
c) What is the value of the option when the price of the stock is $50 and the interest rate is 5 percent, 10 percent, or 15 percent?
d) What is the value of the option when the price of the stock is $50 and the volatility of the stock is 0.40, 0.30, or 0.10?
e) What generalizations can be derived from the solutions to these problems?
Step by Step Answer:
The variables that affect an options value according to the Black Scholes option valuation model The...View the full answer
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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