Your firm has a well-respected economic research staff. The staff members have been successful in developing econometric models that can predict macroeconomic variables with a surprisingly degree of accuracy. The economic research staff would like to know which variables to monitor if options are ultimately used by the firm. In four hundred words explains to Mr. Curtis how the listed variables impact the prices of call options and what the associated theory is behind each relationship:

1. Stock price
2. Risk-free rate
3. Exercise price
4. Stock volatility

It is also important to recognize if put-call parity conditions are being met; if not, an arbitrage opportunity exists for the firm. In the following situation, identify whether or not an arbitrage opportunity exists if

• The call price = $1.15.
• Exercise price = $22.50.
• Time to expiration = 60 days.
• Put price = $0.55.
• Annual interest rate = 12%.
• The stock pays 0 dividends.

Answer rating: 100% (QA)

The pricing of call options is influenced by several key variables each playing a distinct role in determining the options value Understanding these r... View the full answer