Which of the following events are likely to increase the market value of a call option on
Question:
a. An increase in the stock's price
b. An increase in the volatility of the stock price
c. An increase in the risk-free rate
d. A decrease in the time until the option expires
Step by Step Answer:
a The value of an option increases as the stock price increases but by less than the sto...View the full answer
Fundamentals of Financial Management
ISBN: 978-1285867977
14th edition
Authors: Eugene F. Brigham, Joel F. Houston
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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