How is the value of a financial option affected by(a) the current price of the underlying asset, (b) theexercise (or strike) price, (c) the risk-free rate,(d) the time until expiration (or maturity), and(e) the variance of returns on the asset?

How is the value of a financial option affected by(a) the current price of the underlying asset, (b) theexercise (or strike) price, (c) the risk-free rate,(d) the time until expiration (or maturity), and(e) the variance of returns on the asset?

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

See similar textbooks

Related questions

Q: Calculate the profit or loss for the portfoli

A: The profit or loss can be determined by subtracting the purchase price of securities from the market…

Q: If a security is underpriced (i.e., intrinsic value > price), then what is the relationship…

A: Intrinsic value of a security is the fair value based on the assessment of its fundamentals and…

Q: In the Black-Scholes option pricing model, the value of a call is inversely related to: a. the…

A: Time to expiration denotes the time period between the formation of derivative contract and the…

Q: How is the call option price impacted by varying the risk free rate of interest? How is the call…

A: 1) Call option is the contract according to which the buyer of the option has the right but not the…

Q: Explain in detail with an example how the change of the variables (like Stock Price, Exercise Price,…

A: Black Scholes Merton is an option valuation model. In Black Scholes Merton formula, there are five…

Q: Describe the five variables (Assets price, Strick price or Exercise Price, Risk- Free- Rate, Time to…

A: Five Variable of Black-Scholes Merton Formula Assets Price Strike Price or Exercise Price Risk…

Q: . What exposure does the writer of a put option have when the opti The obligation to buy the asset…

A: A put option is an instrument which provides its holder an option to sell an underlying asset on a…

Q: The expected return on the market is the risk-free rate plus the A. diversified returns B.…

A: According to CAPM model: expected return=rf+beta×rm-rfwhere,rf=risk free raterm=market return

Q: According to the CAPM, the expected return of an asset that has just diversifiable risk and no…

A: As per CAPM, Expected Return = Rf + ( Beta * (Rm -Rf)) Rf = Risk free rate of return Rm = Market…

Q: The value of real option calculated using volatility of revenue of the real option in the presence…

A: As per the honor code, we’ll answer only one question at a time, we have answered the first question…

Q: When adding real estate to an asset allocation program that currently includes only stocks, bonds,…

A: The question is based on the concept of risk of portfolio, which different asset class. The…

Q: . The difference between the expected (c equired) return for the market portfolio ar he risk-free…

A: This pertains to the CAPM (capital asset pricing model). The difference between expected return on a…

Q: Beta is which of the following: A) standard deviation. B) total risk. C) Beta is the relationship…

A: option C is correct Beta is the relationship which is between an investment's return, and the…

Q: arket's Risk premium measures Select one: a. The market return plus the risk free rate. b. The…

A: The market risk premium represents the market participants demand extra return by increasing the…

Q: Explain the following terms, Option price and Strike price

A: Option price and strike price are essential terms which are used in derivative markets. These are…

Q: What is relationship between the returns on an asset and returns in the whole mark

A: A market portfolio is a theoretical concept that means a portfolio that consists of all the stocks…

Q: Which one of the following is the formula that explains the relationship between the expected return…

A: The risks which is common for all business entities operating in the economic environment then the…

Q: Why are the probabilities of stock price movements not used in the binomial model for calculating an…

A: The binomial option pricing framework was established in 1979 as a technique for valuing options.…

Q: The CAPM states that the expected (required) return on an asset is : E(Ri)=Rf+βi[E(RM)−Rf] where…

A: The Market portfolio will be reflective of a portfolio which has completely eliminated all the…

Q: If the time to expiration falls and the put price rises, then what has happened to the put option’s…

A: Options are derivative contracts, it gives an investor the right (but not obligation) to buy/sell an…

Q: The measure of risk for a security held in a diversified portfolio is:a. Specific risk.b. Standard…

A: the standard deviation of returns is the measure of risk which measures the dispersion of variables.…

Q: "Financial Derivative and Risk Management" Why are the probabilities of stock price movements not…

A: Option prices are basically the sum of the intrinsic and time value of an option. The price…

Q: What is the difference in cash flow between short-selling an asset and entering a short futures…

A: The investment strategy adopted by the trader where the trader sells the security with the intention…

Q: What is the equation for the Security Market Line? Define each term. If an asset has a beta of 2.0,…

A: The security market line represents the capital asset pricing model (CAPM) on the graph. The…

Q: ich of the following inputs is not required to price option using the Black‐Scholes model? a) the…

A: Introduction: The Black-Scholes model is a differential equation used in financial theory. The…

Q: What is the best way to measure of risk for an asset held in isolation, and which is the best…

A: The "coefficient of variation" is the ideal indicator of the hazard of an individual asset.…

Q: What does the term risk aversion mean, and howis risk aversion related to the expected return on…

A: Introduction: Risk can be characterized in terms of the uncertainty of future consequences resulting…

Q: According to the CAPM (capital asset pricing model), and the security market line is a straight…

Q: Which of the following is included inthe risk-free rate? O A. the default premium O B. the expected…

A: Risk free rate is the return on the asset that has zero risk associated to it. It is a theoretical…

Q: If a financial asset has an expected return that is greater than what is necessary to compensate for…

A: If expected return is more than necessary for compensating risk, investors are earning alpha return…

Q: Equating theoretical option price and the market option price, we can solve for implied indicators.…

A: Option price is based on 1) Strike price 2) volatility 3) risk free rate 4) spot price

Question

How is the value of a financial option affected by
(a) the current price of the underlying asset, (b) the
exercise (or strike) price, (c) the risk-free rate,
(d) the time until expiration (or maturity), and
(e) the variance of returns on the asset?

Video Video

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

What is relationship between the returns on an asset and returns in the whole market (market portfolio)?
What are the quantitative characteristics of the asset and how to measure. How does one asset in the same portfolio influence the other one in the same portfolio. What could be the influence of this relationship to the investor's portfolio? What is relationship between the return on an asset and returns in the whole market (market portfolio)?
Which of the following inputs is not required to price option using the Black‐Scholes model? a) the asset price b) the time to maturity c) the asset’s risk premium d) the risk‐free rate of interest
How is the call option price impacted by varying the risk free rate of interest? How is the call option price impacted by varying the volatility?
Describe the five variables (Assets price, Strick price or Exercise Price, Risk- Free- Rate, Time to Expiration, Volatility) that Black-Scholes-Merton Formula uses to calculate the price of call and put options. Explain how the change in these variables (Assets price, Strick price or Exercise Price, Risk- Free- Rate, Time to Expiration, Volatility) affects the price of the option.
What is the correct way to determine the value of a long forward position at expiration? The value is the price of the underlying ... ... multiplied by the forward price. ... divided by the forward price. ... plus the forward price. ... minus the forward price please need type answer not an image
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.
The contribution of an individual asset to the riskiness of a fully diversified portfolio depends primarily on which of the following? The covariance of the asset's return with the return of the rest of the portfolio The variance of the asset's return The covariance of the asset's return with the return on the riskless asset The skewness of the asset's return
Real Options & Game Theory: The value of a call option and a put option is influenced by the following variables: - Underlying asset value- Strike Price- Variance of Underlying asset- Time to Expiration What effect would an increase in each of these variables have on the value of a calloption and a put option?
In the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by ________. the level of the security market line the slope of the security market line the difference between the beta and the risk-free rate the risk-free rate
The Capital Asset Pricing Model (CAPM) describes a relationship between the expected return of,,, a)An individual share and its variance risk b)An individual share and its standard deviation risk c)An individual share and its undiversifiable risk d)An individual share and its diversifiable risk
Market's Risk premium measures Select one: a. The market return plus the risk free rate. b. The risk free rate and market portfolio rate of return c. The risk free rate plus the risk premium d. The change in the risk free rate and the market return e. The difference between return on market portfolio and risk-free rate