Look back at Table 20.2. Now construct a similar table for put options. In each case construct
Question:
Look back at Table 20.2. Now construct a similar table for put options. In each case construct simple example to illustrate your point.
1. If there is an increase in: Stock price (P) Exercise price (EX) The change in the call option price is: Positive Negative Positive Positive Interest rate (r) Time to expiration (t) Volatility of stock price (a) Positive 2. Other properties: a. Upper bound. The option price is always less than the stock price. b. Lower bound. The option price never falls below the payoff to immediate exercise (P - EX or zero, whichever is larger). c. If the stock is worthless, the option is worthless. d. As the stock price becomes very large, the option price approaches the stock price less the present value of the exercise price.
Step by Step Answer:
Consider the following base case assumptions P 100 EX 100 r f 5 t 1 50 Then using the BlackSchol...View the full answer
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers
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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