Purchase Solution

# Variables Affecting Option Price

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Applying the following matrix, state whether the variable would increase or decrease the value of the call or put, keeping all other variables constant. Arrows imply increasing or decreasing the value of the variable. DISCUSS YOUR REASONING FOR EACH VARIABLE.

Variable Call Value Put Value
Stock price (&#8593;) Increase Decrease

Exercise price (&#8595;) Increase Decrease

Volatility (&#8593;) Increase Increase

Time to expiration (&#8595;) Decrease Decrease

Interest rates (&#8593;) Increase Decrease

see attached

##### Solution Summary

The effect of variables -stock price, exercise price, volatility, time to expiration, interest rates on call and put value

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Discussion Question
Option Pricing Variables

Applying the following matrix, state whether the variable would increase or decrease the value of the call or put, keeping all other variables constant. Arrows imply increasing or decreasing the value of the variable. DISCUSS YOUR REASONING FOR EACH VARIABLE.

Variable Call Value Put Value
Stock price (&#8593;) Increase Decrease

Exercise price (&#8595;) Increase Decrease

Volatility (&#8593;) Increase Increase

Time to expiration (&#8595;) Decrease Decrease

Interest rates (&#8593;) Increase Decrease

Value of option = Intrinsic Value + Time Value
Options have Intrinsic Value and Time Value. Intrinsic value is the value of an option if it is exercised now. Intrinsic value is actual difference between ...

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