PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 21, Problem 26PS
Option delta Show how the option delta changes as the stock price rises relative to the exercise price. Explain intuitively why this is the case. (What happens to the option delta if the exercise price of an option is zero? What happens if the exercise price becomes indefinitely large?)
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Students have asked these similar questions
Which of the following describes delta?
O The ratio of the option price to the stock price
None of these
O The ratio of a change in the option price to the corresponding change in the stock price
The ratio of a change in the stock price to the corresponding change in the option price
O The ratio of the stock price to the option price
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Explain in detail with an example how the change of the variables (like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration) of Black-Scholes-Merton Formula affect the price of the option.
6. Explain why an option’s time value is greatest when the stock price is near the exercise price and why it nearly disappears when the option is deep in- or out-of-the- money.
Chapter 21 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 21 - Binomial model Over the coming year, Ragworts...Ch. 21 - Binomial model Imagine that Amazons stock price...Ch. 21 - Prob. 3PSCh. 21 - Binomial model Suppose a stock price can go up by...Ch. 21 - Prob. 6PSCh. 21 - Two-step binomial model Suppose that you have an...Ch. 21 - Prob. 8PSCh. 21 - Option delta a. Can the delta of a call option be...Ch. 21 - Option delta Suppose you construct an option hedge...Ch. 21 - BlackScholes model Use the BlackScholes formula to...
Ch. 21 - Option risk A call option is always riskier than...Ch. 21 - Option risk a. In Section 21-3, we calculated the...Ch. 21 - Prob. 16PSCh. 21 - Prob. 18PSCh. 21 - American options The price of Moria Mining stock...Ch. 21 - American options Suppose that you own an American...Ch. 21 - American options Recalculate the value of the...Ch. 21 - American options The current price of the stock of...Ch. 21 - American options Other things equal, which of...Ch. 21 - Option exercise Is it better to exercise a call...Ch. 21 - Option delta Use the put-call parity formula (see...Ch. 21 - Option delta Show how the option delta changes as...Ch. 21 - Dividends Your company has just awarded you a...Ch. 21 - Option risk Calculate and compare the risk (betas)...Ch. 21 - Option risk In Section 21-1, we used a simple...Ch. 21 - Prob. 30PS
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- What impact does each of the followingparameters have on the value of a call option?(1) Current stock pricearrow_forwardExplain why the price of a put option is higher when the strike price is higher.arrow_forwardWe showed in the text that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the put-call parity theorem as well as a numerical example to prove your answer.arrow_forward
- In the Black-Scholes option pricing model, the value of a call is inversely related to: a. the risk-free interest stock b. the volatility of the stock c. its time to expiration date d. its stock price e. its strike pricearrow_forwardWhat impact does each of the followingparameters have on the value of a call option?(5) Variability of the stock pricearrow_forwardIf the time to expiration falls and the put price rises, then what has happened to the put option’s implied volatility?arrow_forward
- Option Price and Interest Rates Suppose the interest rate on T-bills suddenly andunexpectedly rises. All other things being the same, what is the impact on call option values? Onput option values?arrow_forwardAnalyze the value of a call option if the stock price is zero? What if the stock price is extremely high (relative to the strike price)?arrow_forwardThe premium on a put option is primarily a function of the difference in spot price S relative to the strike price X, the time until maturity T, and the volatility of the currency o. P = f(S-X, T, o) For each characteristic of a put option, use the table to indicate whether that would lead to a higher put option premium or a lower put option premium (all else equal). Characteristic A lower spot price relative to the strike price A shorter time before expiration A higher level of volatility for the currency Higher Put Option Premium Lower Put Option Premium When using a put option to hedge receivables in an international currency, a U.S. based MNC can lock in the receive. minimum maximum amount of dollars it willarrow_forward
- How is the intrinsic value of the call option impacted as the stock price changes? How is the time value of the call option impacted as the stock price changes?arrow_forwardWhich of the following statements true? A call option price is increasing in stock return volatility A put option price is decreasing in stock return volatility I. II. A) I. and II. are true B) I. is true and II. is false C) II. is true and I. is false D) I. and II. are false |arrow_forwardWho correctly identifies the effect of increases in volatility of the underlying asset on option prices? Johnny Kyle Linda Johnny Mike [↓ = decrease, t = increase] O Kyle O Linda Call price ↑ ↑ ↓ ↓ Mike Put Price ↑ ↓ ↓ ↑arrow_forward
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