Assignment Question - W8
Aanil 
Week8.pdf
Runningc Head:c CALLc OPTIONc c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c 1
8-2c Shortc Paper:c Callc Optionc Price
SNHU
CALLc OPTIONc c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c
c c 2
Thec stockc pricec isc thec currentc pricec ofc eachc sharec thatc isc issuedc byc ac publicly-tradedc businessc
entity.c Thec callc pricec isc thec specificc pricec atc whichc ac callablec share’sc issuerc hasc thec rightc toc buyc itc
backc fromc thec creditorc orc investor.c Thec changec inc thec stockc pricec hasc ac directc impactc onc thec callc
optionc price.c Whenc thec stockc pricec increases,c therec isc anc increasec inc thec valuec ofc thec callc option.c
Whenc thec stockc pricesc goc up,c higherc isc thec pricec ofc thec callc option.c Onc thec otherc hand,c whenc therec
isc ac declinec inc thec stockc pricec ofc ac business,c itsc callc optionc pricec alsoc diminishes.c Inc thec casec ofc callc
options,c thec fluctuationc inc thec pricec relatingc toc thec underlyingc stockc actsc asc onec ofc thec mainc factorsc
thatc influencec thec risec orc declinec inc thec pricec ofc callc options.c Hencec thec pricec ofc thec callc optionc
increases,c andc itc becomesc morec valuablec whenc therec isc anc increasec inc thec stockc pricec (Chapterc 21c .c
Optionsc -c Universityc ofc Houston,c 2021).c
Effectc ofc Timec expirationc ac callc optionc price
Timec expiationc isc thec keyc componentc thatc hasc anc impactc onc thec timec valuec ofc elementc ofc
thec premiumc ofc anc option.c Whenc thec expirationc periodc approaches,c thec levelc ofc thec timec valuec ofc ac
callc optionc reducesc orc getsc eroded.c Inc casec therec existsc morec timec untilc thec expiration,c thec timec
valuec ofc thec callc optionc isc higher.c Itc impliesc thatc ifc therec isc ac higherc timec untilc thec expiration,c thec
callc optionc pricec isc high.c Asc thec expirationc getsc nearer,c thec pricec ofc thec callc optionc startsc toc declinec
andc diminish.c Thec timec componentc isc anc instrumentalc factorc thatc mustc bec takenc intoc considerationc
whilec buyingc andc sellingc options.c Whenc amplec timec isc available,c andc thec expirationc datec isc far,c thec
callc option’sc valuec andc thec pricec arec high.c Whenc thec timec totallyc expires,c thec pricec ofc ac callc optionc
turnsc toc zero.c Onc thec contrary,c whenc thec timec toc expirationc increases,c thec callc optionsc becomec morec
valuable,c andc theirc pricesc risec (Chapterc 21c .c Optionsc -c Universityc ofc Houston,c 2021).c c c
Effectc ofc Risk-freec ratec onc ac callc optionc price
CALLc OPTIONc c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c
c c 3
Thec risk-freec ratec refersc toc thec interestc thatc anc investorc expectsc toc receivec fromc anc entirelyc
risk-freec investmentc overc ac specificc periodc ofc time.c Itc playsc ac vitalc rolec inc influencingc thec pricec ofc ac
callc option.c Whenc thec risk-freec ratec rises,c thec valuec orc pricec ofc ac callc optionc alsoc rises.c Therec existsc
ac directc associationc betweenc thec risk-freec ratec andc thec callc optionc pricec ofc ac stock.c Thec risk-freec
ratec canc bec consideredc toc bec thec ratec ofc returnc thatc anc investorc getsc onc thec stock.c Itc isc ac vitalc
componentc thatc canc havec anc influencec onc thec pricingc modelsc relatingc toc options.c Callc optionsc havec
ac positivec RHO,c whichc impliesc thatc theyc arec positivelyc linkedc toc thec alterationc inc thec interestc rates.c
Anc increasec inc thec interestc ratec hasc thec potentialc toc increasec thec callc premiums.c Onc thec otherc hand,c
anc increasec inc thec interestc ratec hasc thec potentialc toc decreasec thec putc premiums.c Inc thec specificc
contextc relatingc toc callc optionc price,c anc increasec inc thec risk-freec ratec increasesc thec pricec andc valuec
ofc ac callc option,c whereasc ac declinec inc thec risk-freec ratec decreasesc thec pricec andc valuec ofc ac callc
optionc (Bloch,c 2019).c
Effectc ofc Standardc Deviationc ofc Stockc returnsc onc ac callc optionc price
‘Standardc deviationc ofc stockc returns’c helpsc toc ascertainc thec riskc thatc isc relatedc toc stocks.c
Whenc thec standardc deviationc ofc stockc returnsc increases,c thec alterationc inc thec valuec ofc thec stockc alsoc
increases.c Itc ultimatelyc increasesc thec possibilityc ofc thec stockc ofc ‘beingc inc thec money’c alsoc
increases.c Inc otherc words,c itc leadsc toc anc increasec inc thec pricec asc wellc asc thec valuec ofc thec callc option.c
Therec existsc ac directc associationc betweenc thec standardc deviationc ofc stockc returnsc andc thec callc
optionc price.c Hencec whenc therec isc ac declinec inc thec standardc deviationc ofc stockc returns,c therec isc ac
reductionc inc thec valuec ofc thec stock,c whichc leadsc toc ac declinec inc itsc callc optionc pricec asc well.c Thec
standardc deviationc ofc stockc returnsc actsc asc ac vitalc measurec thatc shedsc lightc onc thec volatilityc thatc
existsc inc thec marketc setting.c Itc servesc asc ac vitalc measurec ofc risk,c whichc helpsc toc determinec thec callc
CALLc OPTIONc c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c c
c c 4
andc putc optionsc values.c Whenc thec returnc relatingc toc thec standardc deviationc ofc ac stockc isc higher,c thec
stockc value,c asc wec asc thec callc optionc valuec andc price,c arec positivelyc impacted.c c
References
Bloch,c D.c A.c (2019).c Optionc pricing:c Theoryc andc applications.c Availablec atc SSRNc 3467551.
