1 answer

Suppose that management would have the opportunity to expand at t = 3 instead of at...

Question:

Suppose that management would have the opportunity to expand at t = 3 instead of at t = 1. Would this increase or decrease the value of the option?
- Increase

- Decrease

- Depends on the volatility

- Impossible to say


Answers

Correct option : Option (a) : Increase

An increase in maturity period of an option tends to increase the value of the option premium due to time value of money and a risk factor attached to it . An option price can be bifurcated into:

~ a difference between the current stock price and the strike price (Intrinsic Value)

and

~a consideration towards time value of option (Extrinsic value)

Hence, an option with a longer maturity would fetch a higher premium as compared to the one with a shorter maturity (keeping other things constant like strike price,risk free rate etc).

Hence, the correct option will be increase.

.

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