Question

A call option on a stock currently worth $50. If the stock’s expected return increases, all...

A call option on a stock currently worth $50. If the stock’s expected return increases, all other things stay the same, does this call option’s price increase, decrease or stay the same? Please explain.

Homework Answers

Answer #1

The value of a stock is inversely proportional to the expected return from the stock that is  to say that if the expected return on a particular stock increases then it will drag the value  of the stock downwards and the value  of the stock will decrease.

Since the price of a call option of calculated using the current price of the stock the price of a call option on that stock will decrease.

PLEASE DON’T FORGET TO GIVE A THUMBS UP ??!!!

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
a.    As the stock’s price decreases, a call option on the stock ___________ in value. b.   ...
a.    As the stock’s price decreases, a call option on the stock ___________ in value. b.    As the stock’s price decreases, a put option on the stock ___________ in value. c.     Given two put options on the same stock with the same time to expiration, the put with the lesser strike price will cost ________ than the put option with the lower strike price. d.    Given two call options on the same stock with the same time to expiration, the...
Suppose you own a call option on a stock for which the following applies: Underlying stock’s...
Suppose you own a call option on a stock for which the following applies: Underlying stock’s price = $50 Strike price = $49 Risk-free rate =6% (cont. compounded) Time to expiration on the option = 4 months Variance of the underlying stock’s return = 0.0169 Find the value of the call and put options using the BSM model.
8. A stock’s Sept 60 put is worth $3.00, has 180 days until expiration and has...
8. A stock’s Sept 60 put is worth $3.00, has 180 days until expiration and has a theta of -.01. If 10 day passes, and all other factors stay the same, what will be the stock option price change?
A non-dividend paying stock is currently selling for $100. All else equal, a call option on...
A non-dividend paying stock is currently selling for $100. All else equal, a call option on this stock would have a lower premium if: a. more than one of these answers are correct b. time had passed. c. the call option had a higher strike price d. the stock's price increases e. the volatility of the stock increases
A six month call option on Harkonnen BioSands stock with a strike of 50 currently sells...
A six month call option on Harkonnen BioSands stock with a strike of 50 currently sells for 3. A put option with the same strike and expiration date sells for 2. The interest rate is 2.5 percent. Harkonnen currently sells for 52 per share. Given all this, explain your arbitrage strategy and how much money you expect to make.
A European put option is currently worth $3 and has a strike price of $17. In...
A European put option is currently worth $3 and has a strike price of $17. In four months, the put option will expire. The stock price is $19 and the continuously compounding annual risk-free rate of return is .09. What is a European call option with the same exercise price and expiry worth? Also, given that the price of the call option is $5, show how is there an opportunity for arbitrage.
In Questions 1 and 2, we have a stock that is currently priced at $50 a...
In Questions 1 and 2, we have a stock that is currently priced at $50 a share, and in one period, it will be worth either $45 or $55. Let’s call this stock, CBA. Suppose that the probability that CBA price will increase is 99% and the probability that it will decrease is 1%. Now, suppose, we have another stock that is currently priced at $50 a share, and in one period, it will be worth either $45 or $55....
A European call option on a stock with a strike price of $50 and expiring in...
A European call option on a stock with a strike price of $50 and expiring in six months is trading at $14. A European put option on the stock with the same strike price and expiration as the call option is trading at $2. The current stock price is $60 and a $1 dividend is expected in three months. Zero coupon risk-free bonds with face value of $100 and maturing after 3 months and 6 months are trading at $99...
A European call option on a stock with a strike price of $50 and expiring in...
A European call option on a stock with a strike price of $50 and expiring in six months is trading at $14. A European put option on the stock with the same strike price and expiration as the call option is trading at $2. The current stock price is $60 and a $1 dividend is expected in three months. Zero coupon risk-free bonds with face value of $100 and maturing after 3 months and 6 months are trading at $99...
Consider a put option and a call option with the same strike price and time to...
Consider a put option and a call option with the same strike price and time to maturity. Which of the following is true? (5 points) It is possible for both options to be in the money. It is possible for both options to be out of the money. One of the options must be in the money. One of the options must be either in the money or at the money. When the stock price increases with all else remaining...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT