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    Question

    Which of the following affect pricing of an Option?

    i. Exercise price ii. Volatility of the underlying iii.Time to expiration iv Risk free interest rate
    A Only i Correct Answer Incorrect Answer
    B Only ii Correct Answer Incorrect Answer
    C Only i, ii and iv Correct Answer Incorrect Answer
    D Only ii, iii and iv Correct Answer Incorrect Answer
    E All the above Correct Answer Incorrect Answer

    Solution

    Option price is affected by: •The spot price of the underlying •exercise price •risk-free interest rate •volatility of the underlying •time to expiration and •dividends on the underlying (stock or index) Before Black and Scholes came up with their option pricing model, there was a widespread belief that the expected growth of the underlying ought to affect the option price. Black and Scholes demonstrate that this is not true.

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