14. Consider a call option on a stock. How do increases in time to maturity and

Question

14. Consider a call option on a stock. How do increases in time to maturity and increases in the volatility of the underlying stock affect the value of the option? Which of the following correctly completes the sentence?

Option value is higher when
a. time to maturity is lower and volatility is lower b. time to maturity is higher and volatility is lower c. time to maturity is lower and volatility is higher d. time to maturity is higher and volatility is higher

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Explanation / Answer

Option D is correct.

The call option price on a stock depends upon several factors. These factors include:

Volatility increases the riskiness of the stock and period to maturity increases the time value premium of the stock. Therefore, Both these factors increases the option price.

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