Answer to Question #18844 in Management for Babar Raja

Question

Which of the following statements is CORRECT?
a. An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value.
b. As the stock’s price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.
c. Issuing options provides companies with a low cost method of raising capital.
d. The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.
e. The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.
4. The current price of a stock is $22, and at the end of one year its price will be either $27 or $

Answer 1

d. The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.

Option is an agreement which is used for risks hadging or insurance, so time is one of the most important features for this operations and the variability of the underlying stock's price too. Changing of this factors can lead to increase or decrease risks and this reflect on the options.