Question: The option on Microsoft stock described in Application 4.4 gave the owner the right to buy one share at $27 one month from now. Microsoft

The option on Microsoft stock described in Application 4.4 gave the owner the right to buy one share at $27 one month from now. Microsoft currently sells for $25 per share, and investors believe there is a 50-50 chance that it could become either $30 or $20 in one month. Now let us see how various features of this option affect its value:

a. How would an increase in the strike price of the option, from $27 to $28, affect the value of the option?

b. How would an increase in the current price of Microsoft stock, from $25 to $27 per share, affect the value of the original option?

c. How would an increase in the volatility of Microsoft stock, so that there was a 50-50 chance that it could sell for either $32 or $18, affect the value of the original option?

d. How would a change in the interest rate affect the value of the original option? Is this an unrealistic feature of this example? How would you make it more realistic?

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