The factors influencing the value of an option.

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Answer 1

Question

Chapter 10, Problem 13Q

Summary Introduction

To discuss: The factors influencing the value of an option.

Expert Solution & Answer

Explanation of Solution

According to person B’s model the following five factors influencing the price of an option:

Underlying asset’s spot price
The strike price on the option
The exercise date of option
Underlying asset’s price volatility
The risk free rate of interest

The profit and loss of an option is associated with the spot price and strike price of an underlying asset. The difference between the spot price and strike price of an option is called the intrinsic value of an option. While considering a call option the intrinsic value is:

Stock price - Exercise price If Stock price > Strike price (option is in the money) Zero If Stock price≤Strike price (option is out of or at the money) For a put option, the intrinsic value is:Exercise price - Stock price If Stock price < Strike price (option is in the money) Zero If Stock price ≥Strike price (option is out of or at the money)

At the time of expiry of a contract the value of an option is equivalent to the intrinsic value. The time value of option is a related with the underlying assets price volatility and time until the expiration date of the option.

If the volatility of price increases the probability of stock price will go up or down in value rises. Therefore, over any given period of time, the bigger the underlying asset’s price volatility, the larger the chance the price of stock will upsurge and the superior the option time value.

The risk free rate of interest influence the option value in a less than pure cut manner. All other stable, as the risk-free rate rises, the growth rate of the stock price rises. Though, the current value of any upcoming cash flows received by the option holder declines. For a call option, the first result have a tendency to upsurge the option price, whereas the second result have a tendency to reduction the price.

It can be exposed that the first result all the time governs the second effect. That is, the call option’s price at all times upsurges as the risk-free rate upsurges. The two effects both tend to decline the put option value. Therefore, the price of a put option drops as the risk-free rate rises.

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Suppose XYZ is a non-dividend-paying stock. Suppose S = $100, σ = 40%, δ = 0, and r = 0.06. What is the price of a 105-strike call option with 1 year to expiration? What is the 1-year forward price for the stock? What is the price of a 1-year 105-strike option, where the underlying asset is a futures contract maturing at the same time as the option?

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Refer to Table 10–6. Price quotes are stated in 1/64ths. What was the closing price of a May 3,990 call option on the S&P 500 Stock Index futures contract on January 13, 2023? Round your closing price answer to 1 decimal place and dollar price answer to the nearest whole number. TABLE 10-6 Option Quotes, January 13, 2023 Underlying Asset: S&P 500 Index (SPX) Closing Value: 3,999.09 Expiration Strike Price Calls Puts Last Volume Open Interest Last Volume Open Interest 04-21-23 3990 140 0 258 164.6 0 223 04-21-23 4010 164.3 257 18,244 144.3 100 17,166 05-19-23 3990 200.7 210 30 169.1 210 52 05-19-23 4010 186.1 303 3,552 279.2 2 3,965 06-16-23 3990 223.3 1 16 178.8 1 1 06-16-23 4010 152.9 0 46 183 1,665 42,159 12-15-23 3975 361 100 2,555 250.1 32 2,438 12-15-23 4025 349.3 0 2,416 268.2 4 2,149 OPTIONS ON INTEREST RATE FUTURES Underlying Asset: March 2023 30-Year Treasury Bond Future Prior Settle: 130'02 Expiration Strike Price Calls Puts…

Answer 2

Question

Chapter 10, Problem 13Q

Summary Introduction

To discuss: The factors influencing the value of an option.

Expert Solution & Answer

Explanation of Solution

According to person B’s model the following five factors influencing the price of an option:

Underlying asset’s spot price
The strike price on the option
The exercise date of option
Underlying asset’s price volatility
The risk free rate of interest

The profit and loss of an option is associated with the spot price and strike price of an underlying asset. The difference between the spot price and strike price of an option is called the intrinsic value of an option. While considering a call option the intrinsic value is:

Stock price - Exercise price If Stock price > Strike price (option is in the money) Zero If Stock price≤Strike price (option is out of or at the money) For a put option, the intrinsic value is:Exercise price - Stock price If Stock price < Strike price (option is in the money) Zero If Stock price ≥Strike price (option is out of or at the money)

At the time of expiry of a contract the value of an option is equivalent to the intrinsic value. The time value of option is a related with the underlying assets price volatility and time until the expiration date of the option.

If the volatility of price increases the probability of stock price will go up or down in value rises. Therefore, over any given period of time, the bigger the underlying asset’s price volatility, the larger the chance the price of stock will upsurge and the superior the option time value.

The risk free rate of interest influence the option value in a less than pure cut manner. All other stable, as the risk-free rate rises, the growth rate of the stock price rises. Though, the current value of any upcoming cash flows received by the option holder declines. For a call option, the first result have a tendency to upsurge the option price, whereas the second result have a tendency to reduction the price.

It can be exposed that the first result all the time governs the second effect. That is, the call option’s price at all times upsurges as the risk-free rate upsurges. The two effects both tend to decline the put option value. Therefore, the price of a put option drops as the risk-free rate rises.

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Answer 3

Question

Chapter 10, Problem 13Q

Summary Introduction

To discuss: The factors influencing the value of an option.

Expert Solution & Answer

Explanation of Solution

According to person B’s model the following five factors influencing the price of an option:

Underlying asset’s spot price
The strike price on the option
The exercise date of option
Underlying asset’s price volatility
The risk free rate of interest

The profit and loss of an option is associated with the spot price and strike price of an underlying asset. The difference between the spot price and strike price of an option is called the intrinsic value of an option. While considering a call option the intrinsic value is:

Stock price - Exercise price If Stock price > Strike price (option is in the money) Zero If Stock price≤Strike price (option is out of or at the money) For a put option, the intrinsic value is:Exercise price - Stock price If Stock price < Strike price (option is in the money) Zero If Stock price ≥Strike price (option is out of or at the money)

At the time of expiry of a contract the value of an option is equivalent to the intrinsic value. The time value of option is a related with the underlying assets price volatility and time until the expiration date of the option.

If the volatility of price increases the probability of stock price will go up or down in value rises. Therefore, over any given period of time, the bigger the underlying asset’s price volatility, the larger the chance the price of stock will upsurge and the superior the option time value.

The risk free rate of interest influence the option value in a less than pure cut manner. All other stable, as the risk-free rate rises, the growth rate of the stock price rises. Though, the current value of any upcoming cash flows received by the option holder declines. For a call option, the first result have a tendency to upsurge the option price, whereas the second result have a tendency to reduction the price.

It can be exposed that the first result all the time governs the second effect. That is, the call option’s price at all times upsurges as the risk-free rate upsurges. The two effects both tend to decline the put option value. Therefore, the price of a put option drops as the risk-free rate rises.

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Answer 4

Question

Chapter 10, Problem 13Q

Summary Introduction

To discuss: The factors influencing the value of an option.

Expert Solution & Answer

Explanation of Solution

According to person B’s model the following five factors influencing the price of an option:

Underlying asset’s spot price
The strike price on the option
The exercise date of option
Underlying asset’s price volatility
The risk free rate of interest

The profit and loss of an option is associated with the spot price and strike price of an underlying asset. The difference between the spot price and strike price of an option is called the intrinsic value of an option. While considering a call option the intrinsic value is:

Stock price - Exercise price If Stock price > Strike price (option is in the money) Zero If Stock price≤Strike price (option is out of or at the money) For a put option, the intrinsic value is:Exercise price - Stock price If Stock price < Strike price (option is in the money) Zero If Stock price ≥Strike price (option is out of or at the money)

At the time of expiry of a contract the value of an option is equivalent to the intrinsic value. The time value of option is a related with the underlying assets price volatility and time until the expiration date of the option.

If the volatility of price increases the probability of stock price will go up or down in value rises. Therefore, over any given period of time, the bigger the underlying asset’s price volatility, the larger the chance the price of stock will upsurge and the superior the option time value.

The risk free rate of interest influence the option value in a less than pure cut manner. All other stable, as the risk-free rate rises, the growth rate of the stock price rises. Though, the current value of any upcoming cash flows received by the option holder declines. For a call option, the first result have a tendency to upsurge the option price, whereas the second result have a tendency to reduction the price.

It can be exposed that the first result all the time governs the second effect. That is, the call option’s price at all times upsurges as the risk-free rate upsurges. The two effects both tend to decline the put option value. Therefore, the price of a put option drops as the risk-free rate rises.

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Answer 5

Chapter 10, Problem 13Q

Summary Introduction

To discuss: The factors influencing the value of an option.

Expert Solution & Answer

Explanation of Solution

According to person B’s model the following five factors influencing the price of an option:

Underlying asset’s spot price
The strike price on the option
The exercise date of option
Underlying asset’s price volatility
The risk free rate of interest

The profit and loss of an option is associated with the spot price and strike price of an underlying asset. The difference between the spot price and strike price of an option is called the intrinsic value of an option. While considering a call option the intrinsic value is:

Stock price - Exercise price If Stock price > Strike price (option is in the money) Zero If Stock price≤Strike price (option is out of or at the money) For a put option, the intrinsic value is:Exercise price - Stock price If Stock price < Strike price (option is in the money) Zero If Stock price ≥Strike price (option is out of or at the money)

At the time of expiry of a contract the value of an option is equivalent to the intrinsic value. The time value of option is a related with the underlying assets price volatility and time until the expiration date of the option.

If the volatility of price increases the probability of stock price will go up or down in value rises. Therefore, over any given period of time, the bigger the underlying asset’s price volatility, the larger the chance the price of stock will upsurge and the superior the option time value.

The risk free rate of interest influence the option value in a less than pure cut manner. All other stable, as the risk-free rate rises, the growth rate of the stock price rises. Though, the current value of any upcoming cash flows received by the option holder declines. For a call option, the first result have a tendency to upsurge the option price, whereas the second result have a tendency to reduction the price.

It can be exposed that the first result all the time governs the second effect. That is, the call option’s price at all times upsurges as the risk-free rate upsurges. The two effects both tend to decline the put option value. Therefore, the price of a put option drops as the risk-free rate rises.

Answer 6

Chapter 10, Problem 13Q

Summary Introduction

To discuss: The factors influencing the value of an option.

Expert Solution & Answer

Explanation of Solution

According to person B’s model the following five factors influencing the price of an option:

Underlying asset’s spot price
The strike price on the option
The exercise date of option
Underlying asset’s price volatility
The risk free rate of interest

The profit and loss of an option is associated with the spot price and strike price of an underlying asset. The difference between the spot price and strike price of an option is called the intrinsic value of an option. While considering a call option the intrinsic value is:

Stock price - Exercise price If Stock price > Strike price (option is in the money) Zero If Stock price≤Strike price (option is out of or at the money) For a put option, the intrinsic value is:Exercise price - Stock price If Stock price < Strike price (option is in the money) Zero If Stock price ≥Strike price (option is out of or at the money)

At the time of expiry of a contract the value of an option is equivalent to the intrinsic value. The time value of option is a related with the underlying assets price volatility and time until the expiration date of the option.

If the volatility of price increases the probability of stock price will go up or down in value rises. Therefore, over any given period of time, the bigger the underlying asset’s price volatility, the larger the chance the price of stock will upsurge and the superior the option time value.

The risk free rate of interest influence the option value in a less than pure cut manner. All other stable, as the risk-free rate rises, the growth rate of the stock price rises. Though, the current value of any upcoming cash flows received by the option holder declines. For a call option, the first result have a tendency to upsurge the option price, whereas the second result have a tendency to reduction the price.

It can be exposed that the first result all the time governs the second effect. That is, the call option’s price at all times upsurges as the risk-free rate upsurges. The two effects both tend to decline the put option value. Therefore, the price of a put option drops as the risk-free rate rises.

Answer 7

Chapter 10, Problem 13Q

Summary Introduction

To discuss: The factors influencing the value of an option.

Answer 8

Expert Solution & Answer

Explanation of Solution

According to person B’s model the following five factors influencing the price of an option:

Underlying asset’s spot price
The strike price on the option
The exercise date of option
Underlying asset’s price volatility
The risk free rate of interest

The profit and loss of an option is associated with the spot price and strike price of an underlying asset. The difference between the spot price and strike price of an option is called the intrinsic value of an option. While considering a call option the intrinsic value is:

Stock price - Exercise price If Stock price > Strike price (option is in the money) Zero If Stock price≤Strike price (option is out of or at the money) For a put option, the intrinsic value is:Exercise price - Stock price If Stock price < Strike price (option is in the money) Zero If Stock price ≥Strike price (option is out of or at the money)

At the time of expiry of a contract the value of an option is equivalent to the intrinsic value. The time value of option is a related with the underlying assets price volatility and time until the expiration date of the option.

If the volatility of price increases the probability of stock price will go up or down in value rises. Therefore, over any given period of time, the bigger the underlying asset’s price volatility, the larger the chance the price of stock will upsurge and the superior the option time value.

The risk free rate of interest influence the option value in a less than pure cut manner. All other stable, as the risk-free rate rises, the growth rate of the stock price rises. Though, the current value of any upcoming cash flows received by the option holder declines. For a call option, the first result have a tendency to upsurge the option price, whereas the second result have a tendency to reduction the price.

It can be exposed that the first result all the time governs the second effect. That is, the call option’s price at all times upsurges as the risk-free rate upsurges. The two effects both tend to decline the put option value. Therefore, the price of a put option drops as the risk-free rate rises.