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What impact does each of the followingparameters have on the value of a call option?(4) Risk-free rate

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 3QTD

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Question

What impact does each of the following
parameters have on the value of a call option?
(4) Risk-free rate

Expert Solution

Introduction

An agreement where the holder has a right to purchase or sell the shares at a specific price at a later date is known as an Option. An option has to be purchased therefore; it has a price. Options can be two types:

Call – the holder of this option intends to or has the right to buy the underlying assets/shares on a later date at a fixed price
Put – the holder of these intends to sell the shares on a later date at a specified price.

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