Difference between revisions of "Determinants of option value"

Revision as of 18:38, 27 August 2020

Determinants of option value

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-The following components determine the value of an option:
+Determinants of option value
-# 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:Real Options]]