Difference between revisions of "Determinants of option value"
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(Replaced content with "Determinants of option value Category:finance Category:Real Options") Tag: Replaced |
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| − | + | The following components determine the value of an option: | |
| + | # Variables Relating to Underlying Asset | ||
| + | ## '''Value of Underlying Asset''' | ||
| + | ### as this value increases, the right to buy at a fixed price (calls) will become more valuable and the right to sell at a fixed price (puts) willbecome less valuable. | ||
| + | ## '''Variance in that value''' | ||
| + | ### as the variance increases, both calls and puts will become more valuable because all options have limited downside and depend upon price volatility for upside. | ||
| + | ## '''Expected dividends on the asset''' | ||
| + | ### Which are likely to reduce the price appreciation component of the asset, reducing the value of calls and increasing the value of puts. | ||
| + | # Variables Relating to Option | ||
| + | ## Strike Price of Options; the right to buy (sell) at a fixed price becomes more (less) valuable at a lower price. | ||
| + | ## Life of the Option; both calls and puts benefit from a longer life. | ||
| + | # Level of Interest Rates; as rates increase, the right to buy (sell) at a fixed price in the future becomes more (less) valuable. | ||
[[Category:finance]] | [[Category:finance]] | ||
[[Category:Real Options]] | [[Category:Real Options]] | ||
Latest revision as of 19:24, 27 August 2020
The following components determine the value of an option:
- Variables Relating to Underlying Asset
- Value of Underlying Asset
- as this value increases, the right to buy at a fixed price (calls) will become more valuable and the right to sell at a fixed price (puts) willbecome less valuable.
- Variance in that value
- as the variance increases, both calls and puts will become more valuable because all options have limited downside and depend upon price volatility for upside.
- Expected dividends on the asset
- Which are likely to reduce the price appreciation component of the asset, reducing the value of calls and increasing the value of puts.
- Value of Underlying Asset
- Variables Relating to Option
- Strike Price of Options; the right to buy (sell) at a fixed price becomes more (less) valuable at a lower price.
- Life of the Option; both calls and puts benefit from a longer life.
- Level of Interest Rates; as rates increase, the right to buy (sell) at a fixed price in the future becomes more (less) valuable.