Question

Discuss the factors that influence the option price.

Answer #1

Solution:

These are major factors that influence the price of the option:

1. Underlying price : Underlying price is the price of the underlying assets for which we are require to find the option price. eg. For Microsoft's option price the underlying will be the stock price of the option

2. Exercise price: It is the price for which options are available. There will be multiple exercise price and different option price.

3. Risk-free rate: It is used to calculate the price of the option. Higher the risk free rate, higher will be the option price

4. Time to expiration: It is the expiry date for which particular option will expire

5. Volatility: Violatility is the expected change in the underlying assets. Higher the volatility, higher will be the option price

6. Interim cash flows : Dividends, or any other cash flow or certain cost will define the option pricing as well.

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