Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: theory and practice. Australia: South-Western.
Chapter 8 Mini Case P. 371
f. What impact does each of the following parameters have on the value of a call option?
(1) Current stock price
(2) Strike price
(3) Option’s term to maturity
(4) Risk-free rate
(5) Variability of the stock price
1. Impact of Current Stock Price on the value of Call Option: The effect on value of call option is directly proportional to current stock price. The value of call option increases with the increase in the current stock price and vice-versa.
2. Impact of Strike Price on the value of Call Option: The effect on value of call option is indirectly proportional to strike price. The lower is the strike price, the higher will be the value of call option and vice-versa.
3.Impact of Option's term to mature on the value of Call Option: The more is the term to mature, the greater is the value of the option.
4. Impact of Risk-free rate on the value of Call Option: The effect on value of call option is directly proportional to risk-free rate. The value of call option increases with the increase in the risk-free rate and vice-versa.
5. Impact of Variability of the Stock Price on the value of Call Option: Call option increase in value with an increase in volatility i.e., variability of the stock price.
Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: theory and practice. Australia: South-Western. Chapter...
Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: theory and practice. Australia: South-Western. Chapter 8 Mini Case P. 371 e. In 1973, Fischer Black and Myron Scholes developed the Black-Scholes option pricing model (OPM). (1) What assumptions underlie the OPM? (2) Write out the three equations that constitute the model. (3) According to the OPM, what is the value of a call option with the following characteristics? Stock price $27.00 Strike price $25.00 Time to expiration 6 month...
Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: theory and practice. Australia: South-Western. Chapter 8 Mini Case P. 370 d. Consider a stock with a current price of P = $27. Suppose that over the next 6 months the stock price will either go up by a factor of 1.41 or down by a factor of 0.71. Consider a call option on the stock with a strike price of $25 that expires in 6 months. The risk-free rate...