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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

OPTIONS Which of the following events are likely to increase the market value of a call option on a common stock? Explain.

  1. a. An increase in the stock’s price
  2. b. An increase in the volatility of the stock price
  3. c. An increase in the risk-free rate
  4. d. A decrease in the time until the option expires

a.

Summary Introduction

To discuss: Whether an increase in stock price can increase the market value of a call option on a stock.

Introduction:

A type of security in a company that denotes ownership is termed as stock. Every company can raise capital funds by issuing stocks.

Explanation

The reason on whether an increase in stock price can increase the market value of a call option on a stock is as follows:

The value of a call option increases when the price of stock also increases...

b.

Summary Introduction

To discuss: Whether an increase in volatility of stock price can increase the market value of a call option on a stock.

Introduction:

An option where the investor buys an asset called call option.

c.

Summary Introduction

To discuss: Whether an increase in risk-free rate can increase the market value of a call option on a stock.

d.

Summary Introduction

To discuss: Whether a decrease in time until the option expires can raise the market value of a call option on a stock.

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