Using the Black-Scholes Model,explain What Happens to the Value of a Call

question 14

Essay

Using the Black-Scholes model,explain what happens to the value of a call as S,T,and σ2 change. Why is the relationship between risk and price different for options than for other securities?
1. As S increases,C (the call premium)increases because the right to buy at the fixed price E has more value as the sale price S rises.
2. As T increases,C increases and as T decreases,C decreases. The less time remaining on the option,the lower its value since there is less time during which the option right is available.
3. As σ increases,C increases.

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Definitions:

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The reappearance of a previously extinguished response after a period of non-exposure to the conditioned stimulus.

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