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

Question

Quizplus · Accepted Answer

The value of a call option is positively related to the underlying stock price as the higher the stock price, the greater the potential for the option to be in-the-money. The value of a call option is also positively related to the risk-free rate as a higher risk-free rate increases the present value of the option's potential payoff. Furthermore, the value of a call option is positively related to time to expiration as a longer time to expiration provides a greater opportunity for the option to be profitable. Finally, the value of a call option is positively related to the volatility of the underlying stock price as higher volatility increases the potential for the stock price to move in favor of the call option holder.

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