(Related to Checkpoint 20.3) (Call option valuation) Consider the following call option: the current price of...

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(Related to Checkpoint 20.3) (Call option valuation) Consider the following call option: the current price of the stock on which the call option is written is $18; the exercise or strike price of the call option is $16; the maturity of the option is 90 days or 0.25 year; the (annualized) variance in the returns of the stock is 0.15; and the risk-free rate of interest is 3.9% per annum. a. What is the value of this call option? b. Value the call option where the exercise price is $23. c. Value the call option under the original assumptions stated above but with an annualized variance in stock returns of 0.28. Why did the value of the call option increase when compared to part a? a. The value of the call option with an exercise price of $16 is $ (Round to the nearest cent.) b. The value of the call option with an exercise price of $23 is $ (Round to the nearest cent.) c. Using the original assumptions from above, the value of the call option with a variance of 0.28 is $ (Round to the nearest cent.) Why did the value of the call option increase when compared to part a? (Select the best choice below.) OA. When volatility decreases, the potential to make money on the option is less because the risk is greater. For this reason, investors are willing to pay more for options on more volatile stocks. OB. When volatility increases, the potential to make money on the option is greater because the risk is less. For this reason, investors are willing to pay more for options on more volatile stocks. C. When volatility increases, the potential to make money on the option is less because the risk is greater. For this reason, investors are willing to pay more for options on more volatile stocks. D. When volatility increases, the potential to make money on the option is greater because there is an increase in the upside potential; however, you can still lose no more than the price of the option. For this reason, investors are willing pay more for options on more volatile stocks. (Related to Checkpoint 20.3) (Call option valuation) Consider the following call option: the current price of the stock on which the call option is written is $18; the exercise or strike price of the call option is $16; the maturity of the option is 90 days or 0.25 year; the (annualized) variance in the returns of the stock is 0.15; and the risk-free rate of interest is 3.9% per annum. a. What is the value of this call option? b. Value the call option where the exercise price is $23. c. Value the call option under the original assumptions stated above but with an annualized variance in stock returns of 0.28. Why did the value of the call option increase when compared to part a? a. The value of the call option with an exercise price of $16 is $ (Round to the nearest cent.) b. The value of the call option with an exercise price of $23 is $ (Round to the nearest cent.) c. Using the original assumptions from above, the value of the call option with a variance of 0.28 is $ (Round to the nearest cent.) Why did the value of the call option increase when compared to part a? (Select the best choice below.) OA. When volatility decreases, the potential to make money on the option is less because the risk is greater. For this reason, investors are willing to pay more for options on more volatile stocks. OB. When volatility increases, the potential to make money on the option is greater because the risk is less. For this reason, investors are willing to pay more for options on more volatile stocks. C. When volatility increases, the potential to make money on the option is less because the risk is greater. For this reason, investors are willing to pay more for options on more volatile stocks. D. When volatility increases, the potential to make money on the option is greater because there is an increase in the upside potential; however, you can still lose no more than the price of the option. For this reason, investors are willing pay more for options on more volatile stocks.