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 rateSolution
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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