The value of a call option is positively related to the following:
I.underlying stock price;
II.risk-free rate;
III.time to expiration;
IV.volatility of the underlying stock price
A)I only
B)II only
C)III only
D)I, II, III, and IV

Question

Quizplus · Accepted Answer

The value of a call option is positively related to the underlying stock price (I), as the higher the stock price, the more valuable the call option will be. The value of a call option is also positively related to the risk-free rate (II), as a higher risk-free rate implies a higher return on investment, making the call option more valuable. The value of a call option is positively related to time to expiration (III), as a longer expiration period gives the stock price more time to move in the desired direction, increasing the likelihood of a profit. Finally, the value of a call option is positively related to volatility of the underlying stock price (IV), as the greater the volatility, the more likely it is that the option will end up in the money.

The Value of a Call Option Is Positively Related to the Following