Asked by Martie Coleman on Apr 26, 2024
Verified
All of the following factors affect the price of a stock option except
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) None of the options are correct.
Stock Option
A financial derivative that gives the holder the right, but not the obligation, to buy or sell a stock at a predetermined price within a specific time period.
Expected Rate of Return
The anticipated yield or gain that an investor expects to earn on an investment, based on past or projected future performance.
- Explain the principal factors influencing the pricing of options, such as the importance of the risk-free rate, the volatility of the stock, and the duration until expiry.
Verified Answer
BF
Brigith FloresApr 29, 2024
Final Answer :
D
Explanation :
The expected rate of return on the stock does not directly affect the price of a stock option. Option pricing models, such as the Black-Scholes model, consider factors like the risk-free rate, the stock's volatility (riskiness), and the time to expiration, but not the stock's expected rate of return.
Learning Objectives
- Explain the principal factors influencing the pricing of options, such as the importance of the risk-free rate, the volatility of the stock, and the duration until expiry.
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