Question: Consider two call options based on Twitter. Both calls have a $40 strike price. However, one call expires in 8 months' time, whereas as the

Consider two call options based on Twitter. Both calls have a $40 strike price. However, one call expires in 8 months' time, whereas as the other call expires in 4 months' time.

The call that expires in 8 months will be priced higher than the call that expires in 4 months. This is because the former has more time for share price to move up above the strike price allowing the call to finish in the money.

However, one could argue that there is also more time for share price to move downwards, meaning the call option may finish out of the money.

Explain why more time before expiry results in an increase in the value of a call option.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Please work out problems using Excel, that shows number calculations. Suppose you have a firm with the following information (ignore financial distress costs): Total Firm value (with $5 million in...

Expected return on Put Option In the example in the attached material, why do you think the put option has a negative expected return (-16.67%), while the call option has a very high positive...

Please work your answers on a separate piece of paper. Make sure to label neatly each question. This is an individual assignment. You can work with your peers, ask me about these questions and...

Problem POS - 2 3 Today the price of XYZ stock is $ 2 9 . The following European call options on XYZ stock expire in six months: Call's strike Price Call's current price $ 2 0 $ 1 0 . 3 5 $ 3 0 $ 4 ....

You have just opened the morning newspaper to check the prices of call options on asset ABC. It is now December, with the near contract maturing in one month's time. Asset ABC is currently trading at...

I need help answering question 13 and 17 in this homework set. Thank you that is all I need currently. HOMEWORK SET 4 Derivatives 1. What is a lower bound for the price of a 4 months call option on a...

I just need questions 30-6 and 30-14 placed on excel and everything must be calculated USING EXCEL. Thank you very much. FIN516 WEEK 3 - HOMEWORK Andrew Plaza Problem 20-6 on Call Options Based on...

4. Option pricing model. Binomial approach Aaa Lean Corp. (Ticker La d uction technology company is considered to be one of the east risky companies in the education sector Investors trade in for...

Here is the previous question that contains the information you need: Please note that you only need to solve problem 2 Problem 2. Suppose now that you consider holding the stock from the previous...

Find the force law from central force field that allows a particle to move 2. find the force Inw for a central force fiels that allows m ove particle to logarith mic spird orlit given ba 'K'and'd'...

Identify ions having the same electronic configuration as noble gases. What ion has the same electronic configuration as each noble gas? Choose all that apply. Ca+ H a. Ne As- I Sr+ Cs+ b. He S- Mg2+...

Which of the following is not a condition that must be met before an accountant can conduct an atteration engromera? Multiple Choice Management accepts responsibility for the matter related to the...

Prepare a balance sheet for Alaskan Peach Corporation as of December 31, 2022, based on the following information: cash = $198,000; patents and copyrights = $852,000; accounts payable $291,000;...