Question

cullct Value of the stock? (15 pts.) Please show the impact of following changes in the value of a call option by the help of BS formula • • • Increase in spot price Increase in exercise price Decrease in interest rate Increase in volatility Increase in time to expiration • while lenine other ariables constant ( ntry

Answer 1

BS formula was developed to estimate the changes of price of an option over time there are some factors that can effect the price of call option according to BS model

If stock price increases the value of the option will be more ; suppose the stock price is 80 and strike price 100 then it will be loss to buy the option at 100 when we can buy it at 80 in the open market but if the stock price is 120 and exercise price is 100 then we should buy the call option at 100 thus when spot price increases the value of option increases.

If exercise price increases means the option is out of the money ; stock price is less than strike price, thus the option will have lower value

Interest rate has minimal effect on call option; if interest rate falls the value of call option will also fall

Increase in volatility will lead to have a increase in the value of call option

Option has limited life span , thus increasing time will lead to have a increase in value, thus increase in time to expiration will have a higher value of the option