IAI Actuarial Core Principles · Economic Modelling · Black-Scholes derivative-pricing model
In the Black-Scholes model for a European call on a non-dividend-paying share, which of the following changes, taken alone, would decrease the call price?
A fall in volatility lowers the call price, because vega is positive and greater uncertainty increases option value. Higher share price, higher rate, longer maturity and lower strike all raise the call value.
- AA decrease in the share's volatilityCorrect
- BAn increase in time to expiry
- CAn increase in the risk-free rate
- DAn increase in the current share price
- A decrease in the strike price
Explanation
Vega is positive, so lower volatility reduces the call price. Longer expiry, higher rate, higher S and lower K all raise the value of a non-dividend European call.
Did you get it right without looking?
One question tells you little. A timed set on Black-Scholes derivative-pricing model shows your real accuracy, how long you take and where you lose marks.
More Black-Scholes derivative-pricing model questions
- A forward contract on an index paying a continuous dividend yield of 2% p.a. is priced with a risk-free rate of 7% p.a. (continuous). The in…
- Market prices of European options on the same share and expiry show implied volatility that is higher for deep out-of-the-money puts than fo…
- A share price is assumed to follow geometric Brownian motion. Which one of the following is a correct consequence under that model, and henc…
- A non-dividend share has S0 = 100, and the risk-free rate is 4% continuously compounded. A forward-type derivative pays S_T^2 at time T = 1 …
- In deriving the Black-Scholes PDE for a derivative value V(S,t) on a non-dividend-paying share, a portfolio holds one derivative and -Delta …
- Under the Black-Scholes model for a European option on a non-dividend-paying share, which statement about delta is correct?