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In: Finance

Option values

 

Explain two determinants of the option prices when valuing assets.

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Expert Solution

Determinants of option pricing:-

Stock price -The call option allow to buy stock with specific price in future. It higher than the price goes. That is more option will worth.

Strike Price -It follow with stock price. The call option is in the money it is stock price higher than strike price and out the money is less than strike price.

Types of option -The call option is holder have right to buy and put option is holder have right to sell underlying at specified price.

Interest rate-It is minimum effect on option value. If interest rate increase the call option value also increase and put option value fall.

Dividend -Options does not receive dividend, but dividend increase a put option value increase and call option value decrease.

Expiration time -Option have limited time their value affect passing f time. Expiration time increase value of option also increase.

Volatility -Forward volatility is measure of implied volatility. Implied volatility implied movement in future and people think stock price will move

stoke price

dividend

expiration time

volatility

 

veronica makokha answered 3 years ago
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