6. Factors that affect the value of optionsAaAaUnderstanding how different factors affect the value of options is the first step to understanding option pricingmodels.The following table shows how increases in the given factors on the left affect the value of a put option. For eachfactor, indicate whether an increase in its value causes the value of the put option to increase or to decrease.Causes the Value of the Put Option ToIncreases in this factor:IncreaseDecreaseUnderlying stock priceExercise priceTime to expirationVolatilityWhich of the following best describes a naked option?When an investor sells call options without the stock to back them upWhen an investor writes call options against stock held in his or her portfolio

An agreement where the holder has a right to purchase or sell the shares at a specific price at a…

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indicate whether an increase in its value causes the value of the put option to increase or to decrease.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter8: Financial Options And Applications In Corporate Finance

Section: Chapter Questions

Problem 2MC

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Assume that you have been given the following information on Purcell Corporations call options: According to the Black-Scholes option pricing model, what is the options value?
Both call and put options are affected by the following five factors: the exercise price, the underlying stock price, the time to expiration, the stock’s standard deviation, and the risk-free rate. However, the direction of the effects on call and put options could be different. Use the following table to identify whether each statement describes put options or call options. Statement Put Option Call Option 1. When the exercise price increases, option prices increase. 2. An option is more valuable the longer the maturity. 3. The effect of the time to maturity on the option prices is indeterminate. 4. As the risk-free rate increases, the value of the option increases.
Which of the following statements is CORRECT? Group of answer choices Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be. Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be. Call options generally sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be. Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock. If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.
Michael Weber, CFA, is analyzing several aspects of option valuation, including the determinants of the value of an option, the characteristics of various models used to value options, and the potential for divergence of calculated option values from observed market prices.a. What is the expected effect on the value of a call option on common stock if the volatility of the underlying stock price decreases? If the time to expiration of the option increases?b. Using the Black-Scholes option-pricing model and an estimate of stock return volatility, Weber calculates the price of a 3-month call option and notices the option’s calculated value is different from its market price. With respect to Weber’s use of the Black-Scholes option-pricing model,i. Discuss why the calculated value of an out-of-the-money European option may differ from its market price.ii. Discuss why the calculated value of an American option may differ from its market price.
Explain the call-put parity relation and how it is justified. Black-Scholes-Merton formula uses five variables to calculate the price of call and put options. Explain each of these variables incorporated in Black-Scholes-Merton formula. Show how the change in these variables affects the price of option. Show how these variables are grouped to show put-call parity relationship and suggest the condition in which there is an arbitrage opportunity. (Explain each of the things in detail with an appropriate examples)
Which of the following best describes the intrinsic value of an option? The Black-Scholes-Merton price of the option The value it would have if the owner had to exercise it immediately or not at all The amount paid for the option The lower bound for the option’s price
fill the missing words: a. For ( ) options, when the spot price is ( ) than(or equal to)the exercise price, then profit/loss equals the premium. b. For ( ) options, when the spot price is ( ) than (or equal to) the exercise price, then the profit/loss will be equal to the option premium.
Both call and put options are affected by the following five factors: the exercise price, the underlying stock price, the time to expiration, the stock’s standard deviation, and the risk-free rate. However, the direction of the effects on call and put options could be different. Use the following table to identify whether each statement describes put options or call options. Statement Put Option Call Option 1. An option is more valuable the longer the maturity. 2. A longer maturity in-the-money option on a risky stock is more valuable than the same shorter maturity option. 3. When the exercise price increases, option prices increase. 4. As the risk-free rate increases, the value of the option increases.
What are the five factors that determine the value of an option, define how changes in each factor cause a change in the value of a call and put, and why do these factors cause either an increase or decrease in the value of a call or put option?
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?
Identify the key parameters that influence option price. Discuss the impact of a rise and fall in the value of each parameter on the prices of put and call options.
Do I understand correct "In date of long call option, option value or intrinsic value = option premium or $5 and in expiration date , option value or intrinsic value = option premium + gain from exercise option in case that market price above strike price and will be zero if market price lower than strike price ,does time value ($5 in this case) was included in option premium or not. If not correct, Could you explain and give example to me to further understand about option value and intrinsic value.