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Describe the 3 factors that affect the size of the premium in an option contract. All...
Describe the 3 factors that affect the size of the premium in an option contract.
All three factors need detailed explanation please!
Solutions
Expert Solution
The three factors that affect the size of premium in options contract are as follows :-
1. Underlying asset and the strike price - the movement in the price of assets and their strike price affect the option premium in a way that if the price of a stock has an increasing trend the call premium will rise as it allows you to buy the stock at a predefined price now and if the the prices surpass the strike price you make profit and the vice versa is the case with putt premium.
2. Time to expiration - as the time to expiration of the contract reduces, the premium reduces because their is left time less to exercise the option
3. Implied volatility - is there is more volatility like in today's recessional environment there is more probability of prices going up and down drastically so the call and put premium both rises.
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jeff jeffy answered 1 year agoRelated Solutions
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In addition to the five factors, dividends also affect the price of an option. The Black–Scholes...
In addition to the five factors, dividends also affect the price
of an option. The Black–Scholes Option Pricing Model with dividends
is:
C=S×e−dt×N(d1)−E×e−Rt×N(d2)C=S×e−dt×N(d1)−E×e−Rt×N(d2)
d1=[ln(S/E)+(R−d+σ2/2)×t](σ−t√)d1= [ln(S /E ) +(R−d+σ2/2)×t ] (σ−t)
d2=d1−σ×t√d2=d1−σ×t
All of the variables are the same as the Black–Scholes model
without dividends except for the variable d, which is the
continuously compounded dividend yield on the stock.
The put–call parity condition is also altered when dividends are
paid. The dividend-adjusted put–call parity formula is:
S×e−dt+P=E×e−Rt+CS×e−dt+P=E×e−Rt+C
where...
In addition to the five factors, dividends also affect the price of an option. The Black–Scholes...
In addition to the five factors, dividends also affect the price
of an option. The Black–Scholes Option Pricing Model with dividends
is:
C=S×e−dt×N(d1)−E×e−Rt×N(d2)C=S×e−dt×N(d1)−E×e−Rt×N(d2)
d1=[ln(S/E)+(R−d+σ2/2)×t](σ−t√)d1= [ln(S /E ) +(R−d+σ2/2)×t ] (σ−t)
d2=d1−σ×t√d2=d1−σ×t
All of the variables are the same as the Black–Scholes model
without dividends except for the variable d, which is the
continuously compounded dividend yield on the stock.
A stock is currently priced at $87 per share, the standard
deviation of its return is 42 percent...
In addition to the five factors, dividends also affect the price of an option. The Black–Scholes...
In addition to the five factors, dividends also affect the price
of an option. The Black–Scholes Option Pricing Model with dividends
is:
C=S×e−dt×N(d1)−E×e−Rt×N(d2)C=S×e−dt×N(d1)−E×e−Rt×N(d2)
d1=[ln(S/E)+(R−d+σ2/2)×t](σ−t√)d1= [ln(S /E ) +(R−d+σ2/2)×t ] (σ−t)
d2=d1−σ×t√d2=d1−σ×t
All of the variables are the same as the Black–Scholes model
without dividends except for the variable d, which is the
continuously compounded dividend yield on the stock.
The put–call parity condition is also altered when dividends are
paid. The dividend-adjusted put–call parity formula is:
S×e−dt+P=E×e−Rt+CS×e−dt+P=E×e−Rt+C
where...
In addition to the five factors, dividends also affect the price of an option. The Black–Scholes...
In addition to the five factors, dividends also affect the price
of an option. The Black–Scholes Option Pricing Model with dividends
is:
C=S×e−dt×N(d1)−E×e−Rt×N(d2)C=S×e−dt×N(d1)−E×e−Rt×N(d2)
d1=[ln(S/E)+(R−d+σ2/2)×t](σ−t√)d1= [ln(S /E ) +(R−d+σ2/2)×t ] (σ−t)
d2=d1−σ×t√d2=d1−σ×t
All of the variables are the same as the Black–Scholes model
without dividends except for the variable d, which is the
continuously compounded dividend yield on the stock.
A stock is currently priced at $82 per share, the standard
deviation of its return is 48 percent...
In addition to the five factors, dividends also affect the price of an option. The Black–Scholes...
In addition to the five factors, dividends also affect the price
of an option. The Black–Scholes Option Pricing Model with dividends
is:
C=S×e−dt×N(d1)−E×e−Rt×N(d2)C=S×e−dt×N(d1)−E×e−Rt×N(d2)
d1=[ln(S/E)+(R−d+σ2/2)×t](σ−t√)d1= [ln(S /E ) +(R−d+σ2/2)×t ] (σ−t)
d2=d1−σ×t√d2=d1−σ×t
All of the variables are the same as the Black–Scholes model
without dividends except for the variable d, which is the
continuously compounded dividend yield on the stock.
The put–call parity condition is also altered when dividends are
paid. The dividend-adjusted put–call parity formula is:
S×e−dt+P=E×e−Rt+CS×e−dt+P=E×e−Rt+C
where...
In addition to the five factors, dividends also affect the price of an option. The Black–Scholes...
In addition to the five factors, dividends also affect the price
of an option. The Black–Scholes Option Pricing Model with dividends
is: C=S×e−dt×N(d1)−E×e−Rt×N(d2) d1=[ln(S/E)+(R−d+σ2/2)×t](σ−t√)
d2=d1−σ×t√ All of the variables are the same as the Black–Scholes
model without dividends except for the variable d, which is the
continuously compounded dividend yield on the stock. The put–call
parity condition is also altered when dividends are paid. The
dividend-adjusted put–call parity formula is: S×e−dt+P=E×e−Rt+C
where d is again the continuously compounded dividend yield....
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