Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 23

As discussed in Application 4.4, a call option provides you with the option to buy a share of, say, Microsoft stock at a specified price of $60. Suppose that this option can only be exercised at exactly 10:00 am on June 1, 2009. What will determine the expected value of the transaction underlying this option? What will determine the variability around this expected value? Explain why the greater this expected variability, the greater is the value of this option.