# Category Archives: OPTION VALUATION

## Time to Expiration/Maturity

Time to Expiration/Maturity It is very evident from the right part of Equation 5.10, that the higher is the value of t, the lower will be the present value of exercise price (to be paid in future year 0. Since this amount is to be subtracted from S to determine C it obviously implies the higher value of call option assuming other, things remain constant. In Example 5.5, let us assume time to expiration of 2 year

## Exercise Price

Exercise Price The exercise price on the date of expiration has a negative influence on the value of a call option that is, the value of Co is negatively related to E, the higher the value of E, the lower is the value of Co and vice-versa. Assuming other factors constant and the value of E increases to Rs 132. the value of Co decreases to Rs 1.68 (i.e. Rs 125 - Rs 123.42, PV of Rs 132 * 0.935).

## Current Share Price

Current Share Price The current share price prevailing in the market has a positive impact on the call value. In other words. the higher is the current market price (So). the higher is the value of the call option. Other things being equal assume in Example. The value of So is Rs 127 (instead of Rs 125). the value of call option. C0 increases by Rs 2 [from Rs 3.45 to Rs 5.45 (i.e, Rs 127 - Rs 121.55)].

## FACTORS INFLUENCING OPTION VALUATION (Table)

TABLE Value of Investment at Year-end 1 (i) When Shares are Purchased and (ii) When Call Options are Purchased in Conjunction with Treasury Bills. FACTORS INFLUENCING OPTION VALUATION Since both the alternatives have the same financial returns, they must a priory have the same value today or it will cause arbitrage opportunity. Since the current price of the share is Rs 125. the value of the call option today

## CALL OPTION BOUNDARIES

CALL OPTION BOUNDARIES Hitherto we have focused on call option valuation on the date of its maturity. What will value before maturity? To explain the concept let us consider Example option is to buy the rating price on the exercise date is the call option has zero value, if the share price turns out to be higher than the option would have worth equivalent to the price of the share (S1) minus the exercise price

## FACTORS INFLUENCING OPTION VALUATION

FACTORS INFLUENCING OPTION VALUATION The objective of this section is to enumerate the factors which determine the worth of a call option. These are: (i) current share price, (ii) exercise price, (iii) risk-free rate, (iv) time to expiration/maturity and (v) price volatility of share. These factors have been illustrated.

## Put Option Payoffs

Put Option Payoffs The put option owner/investor, is benefited when the share price prevailing on the due of maturity is less than the strike price at which he has acquired the right to sell the shares to the put option writer.

## Call Option Payoffs

Call Option Payoffs The call option owner's loss is limited to the call option premium. The profit he can earn is not so limited. In case the market price of the share on the expiration date turns out to be substantially higher than the exercise price, hi, total profit from the call option contract would be substantial in relation to the investment (equivalent to the call option premium paid up-front) he has m

## OPTION PAYOFFS

OPTION PAYOFFS The objective of this section is to provide a comparative picture of financial returns (or losses) available 10 the option buyer ris-a-ris the buyer of securities. The gain to the option buyer is the loss to the option seller. Call option payoffs are discussed first, followed by put option payoffs. Finance-Assignments.comInstructions Feel free to send us an inquiry, we reply back real quick.

## Put Option

Put Option A put option is just the opposite of a call option. A put option gives the holder the right but not the obligation to sell securities (i.e. to put them) on or by a certain date at a fixed exercise price, In other words, the seller/writer of the put option has the obligation to buy securities in case the put owner decides to exercise his option. Since the put option writer is at the receiving end, he