Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
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Chapter 5, Problem 3Q
Summary Introduction
To discuss: The effects on call option’s price on given factors.
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Describe the effect of a change in each of the following factors on the value of a calloption:1. Stock price2. Exercise price3. Option life4. Risk-free rate
Describe the effect on a call option’s price that results from an increasein each of the following factors: (1) stock price, (2) strike price, (3) time toexpiration, (4) risk-free rate, and (5) standard deviation of stock return.
Describe the effect of a change in each of the following factorson the value of a call option: (1) stock price, (2) exercise price,(3) option life, (4) risk-free rate, and (5) stock return standarddeviation (i.e., risk of stock).
Chapter 5 Solutions
Intermediate Financial Management
Ch. 5 - Define each of the following terms:
Option; call...Ch. 5 - Prob. 2QCh. 5 - Prob. 3QCh. 5 - Prob. 1PCh. 5 - The exercise price on one of Flanagan Companys...Ch. 5 - Black-Scholes Model
Assume that you have been...Ch. 5 - Put–Call Parity
The current price of a stock is...Ch. 5 - Prob. 5PCh. 5 - Binomial Model The current price of a stock is 20....Ch. 5 - Prob. 7P
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- 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_forwardWhich of the following events are likely to increase the market value of a calloption on a common stock? Explain.a. An increase in the stock’s priceb. An increase in the volatility of the stock pricec. An increase in the risk-free rated. A decrease in the time until the option expiresarrow_forwardThe Black-Scholes OPM is dependent on which five parameters? Select one: a. Stock price, exercise price, risk free rate, beta, and time to maturity b. Stock price, risk free rate, beta, time to maturity, and variance c. Stock price, exercise price, risk free rate, standard deviation and time to maturity d. Stock price, risk free rate, probability, standard deviation and exercise pricearrow_forward
- a. Explain how and why an increase in each of the following affects the prices of both call and putoptions, holding all other variables constant: i. The current stock price ii. The strike pricearrow_forwardA stock's risk premium is equal to the: expected market risk premium times beta. expected market risk premium multiplied by beta plus the risk-free return. Risk-free return plus expected market return. expected market return times beta.arrow_forwardExplain 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.arrow_forward
- Which of the following techniques is used to value stock options? a. Black-Scholes method b. Zero-coupon method c. Weighted-average method d. Expected earnings methodarrow_forward(a) the expected returns of the stocks A and B.arrow_forwardIn evaluating (stock) portfolio return we use the market values at the beginning of the period to compute the weighting. Explain why.arrow_forward
- 1. Beta is positively related A. the degree of correlation between a stock's return and the market return B. the systematic risk of a stock C. risk premium required by the stock D. all of the abovearrow_forwardi) Calculate the expected return for each stock assuming the Capital Asset Pricing Model (CAPM) is valid, and explain if they are correctly priced. Show your calculations.arrow_forward(a) A stock’s returns have the following distribution: Calculate the stock’s expected return, standard deviation, and the coefficient of variation.arrow_forward
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