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Assume an initial underlying stock price of $20, an exercise price of $20, a time to...

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Finance

Assume an initial underlying stock price of $20, an exerciseprice of $20, a time to expiration of 3 months, a risk free rate of12% and a underlying stock return variance of 16%. If the risk freerate decreased to 6% and assuming other variables are heldconstant, the call option value would

A) increase

B) remain the same

C) decrease

D) indeterminate from the information given

Answer & Explanation Solved by verified expert
4.4 Ratings (809 Votes)
Std dev variance12 01605 04 40 As per Black Scholes Model Value of call option SNd1Nd2Kert Where S Current price 20 t time to expiry 025 K Strike price 20 r Risk free rate 120 q    See Answer
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Transcribed Image Text

Assume an initial underlying stock price of $20, an exerciseprice of $20, a time to expiration of 3 months, a risk free rate of12% and a underlying stock return variance of 16%. If the risk freerate decreased to 6% and assuming other variables are heldconstant, the call option value wouldA) increaseB) remain the sameC) decreaseD) indeterminate from the information given

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