Asked by Abbas Ghaderi on May 11, 2024
Verified
Which of the following factors affect the price of a stock option?
A) The risk-free rate
B) The riskiness of the stock
C) The time to expiration
D) The expected rate of return on the stock
E) The risk-free rate, riskiness of the stock, and time to expiration
Risk-Free Rate
The theoretical rate of return of an investment with zero risk, serving as a baseline for assessing the risk and return on other investments.
Stock Option
A derivative financial instrument that gives the holder the right to buy or sell a stock at a specified price before a certain date.
Time to Expiration
Time to expiration refers to the duration until the expiry date of a derivative contract, such as options or futures, impacting its value and the strategies of investors holding or trading it.
- Elucidate the critical elements that determine option pricing, highlighting the impact of the risk-free interest rate, the fluctuation in stock prices, and the time remaining until the option expires.
Verified Answer
Learning Objectives
- Elucidate the critical elements that determine option pricing, highlighting the impact of the risk-free interest rate, the fluctuation in stock prices, and the time remaining until the option expires.
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