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.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 12QTD

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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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