Modigliani-Miller Theorem I.7. OptionsA. How does the price of a call option respond to the following changes, other thingsequal? Does the price go up or down? Explain briefly the intuition for youranswer.(i). Exercise price rises.(ii). Volatility of stock price rises.3 B. Suppose FlyByNight Corporation (FBN) is selling a one-year European calloption that has an exercise price of $40. Assume that FBN's stock is currentlyselling for $35 and that over the coming year the price will either rise to $80 orfall to $22. Also assume that the one-year rate of interest is 10 percent. Whatwould be the market price for this call option? Please explain carefully.notonenda li

Price of an option depends on following factors: Strike price or exercise price, Time to maturity,…

How does the price of a call option respond to the following changes, other things equal? Does the price go up or down? Explain briefly the intuition for your answer. (i). Exercise price rises. (ii). Volatility of stock price rises.

How does the price of a call option respond to the following changes, other things equal? Does the price go up or down? Explain briefly the intuition for your answer. (i). Exercise price rises. (ii). Volatility of stock price rises.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter5: Financial Options

Section: Chapter Questions

Problem 6MC

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Question

Modigliani-Miller Theorem I.
7. Options
A. How does the price of a call option respond to the following changes, other things
equal? Does the price go up or down? Explain briefly the intuition for your
answer.
(i). Exercise price rises.
(ii). Volatility of stock price rises.
3

B. Suppose FlyByNight Corporation (FBN) is selling a one-year European call
option that has an exercise price of $40. Assume that FBN's stock is currently
selling for $35 and that over the coming year the price will either rise to $80 or
fall to $22. Also assume that the one-year rate of interest is 10 percent. What
would be the market price for this call option? Please explain carefully.
not
onend
a li

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What impact does each of the followingparameters have on the value of a call option?(5) Variability of the stock price
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Explain in detail with an example how the change of the variables (like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration) of Black-Scholes-Merton Formula affect the price of the option.
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Select all that are true with respect to the Black Scholes Option Pricing Model (OPM) in practice): Group of answer choices BSOPM assumes that the volatility of the underlying stock returns is constant over time. BSOPM assumes that the underlying stock can be traded continuously. BSOPM assumes that there are no transaction costs. There is only one input to the BSOPM that is not observable at the time you are valuing a stock option, and that input is volatility. Implied volatility is estimated by calculating the daily volatility of the underlying stock’s return that occurred over the prior six months.
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