Explain the effect of interest rates and volatility on both calls and puts. Calculate T if...

Explain the effect of interest rates and volatility on both calls and puts. Calculate T if today is March 10 and the option ends on September 5.

please explain clearly

Expert Solution

It is always recommended to the investors to exercise the call option at its earliest at the time the price of share rises in order to save from the reduction in the call option value.

Further, the put option should be exercised only when the strike price would fall to protect the investors from the depreciation one could face on time value.

The volatility would had a positive relation with the value of call and put option because when the volatility would be higher the option value will go up due to increase in the probability of strike price availability.

For example, the call option strike price is 100 and the value of stock in the market is 125. The profits on the premium would be 25, now the investor decide to hold the option for the longer period of time and the price would be around 125 only. The call premium will reduce due to the depreciation in the time value of money.

Time (T) = March 10 – September 5

= 21 days of March + 30 April Days + 31 May Days + 30 June Days + 31 July Days + 31 August Days + 5 September Days

= 179 Days in total

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