Question

please answer question 5

 5. In using the Black-Scholes call option formula, what would be the effect on the call option 

• a. if σ  rises, other things remaining the same? 

• b. if T falls, other things remaining the same? 

• c. if the current stock price rises, other things remaining the same? 

Answer 1

Black Scholes Call option formula pot silay but C = SxNcd ) xertixne (da) 3 lathere. . C - Value of call option teminin ** stock price, ozis n -exercise price, r- Annual risk-freerate aj vittime to maturity o - Annual standard olwiation of return adidi) Inset Cr+53)xt 435 so UDD for St Crite 2 : Petildo) - Pins 4 (n-3)xt per ld,) = 1 = Voxt WOM, If we igriore for the moment the terms N(d,) and Aldizla formula based on the Expression in So-ke-rt. What happens if the variable So is less than ke Since the call option price cannot be negative N(d) and Mcdo come to give positive value.

kihen the difference to these two terms increases the intrinsic value of the call option increases, and lalhen the difference ofw the terms decreases, the intrinsic valeu g call option decreases. @ if o rises, other things remaining the ... some , then value of call option increanes because the difference 6/0 - these two terms increases ® if I falls second tem in formula dlecreanos termost value of cale option decrcanes ist © current Stöck iprice ti ses, then value gi call options increcires sosia afwreling to formula. Cela se then