The spot price of the underlying asset is that of oil, the volatility of the underlying asset is that of oil, the strike price is the full cost per barrel and the
time to expiration is that of each option.
Table 6 shows that the MAPE of RMEL is much less than 10% for the ITM and DITM cases but basically increases with
time to expiration. Second, from Tables 5 and 6, based on the MPE, IBM calls are overall underpriced by the RMEL method as are IBM puts, with the exception of the case of ITM and short term to expiration.
Comparison of investment opportunity and call option Real options Financial options Investment opportunity Variable Call option Current value of cash flows S Current stock price Investment expenditure X Exercise stock price Possible time of decision to T-t
Time to expiration defer date Time value of money R Riskless return rate Uncertainty of future cash [[sigma].sup.2] Variance of returns on flows stock
For our example, the
time to expiration is two years.
[TTEXPIRY.sub.jt] = the
time to expiration for option j on day t, expressed in years, and
To the extent these assumptions are not satisfied, the true value of the call option component could deviate from the calculated value.(8) However, Chen and Sears |5~ report that the Black-Scholes option pricing model produced satisfactory results when used to value the call option component of SPINs, whose initial
time to expiration is close to the SIGNs' initial
time to expiration.
In reality, the
time to expiration of a land-use conversion option associated with a given tract might approach [infinity].
S&P 500 futures fell 4.3 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and
time to expiration on the contract.
S&P 500 futures fell 4 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and
time to expiration on the contract.
S and P 500 futures fell 0.5 point but were just above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and
time to expiration on the contract.
At a current price of $113, a call option on XYZ with a $100 strike price has an intrinsic value of $13 per share (current market price of $113 less strike price of $100).3 This is the intrinsic value regardless of the
time to expiration. An option that has intrinsic value is known as being "in the money," and the intrinsic value will vary based on the strike price.
Current stock price $50 Option exercise price $50 Risk-free interest rate 6.5%
Time to expiration (in years) 6 Expected volatility of stock 30% Expected dividend yield 1.5%