Consider the following parameters during the pricing of a knock-out put option: So: $50.00 K: $51.00 H: $49.00 σ: 10% Complete the following sentences that apply to changes in the inputs during initial pricing: (Please note that all scenarios below are independent) If K was higher, with other inputs unchanged, the value of the option premium would
Question
Consider the following parameters during the pricing of a knock-out put option: So: 51.00 H: $49.00 σ: 10% Complete the following sentences that apply to changes in the inputs during initial pricing: (Please note that all scenarios below are independent) If K was higher, with other inputs unchanged, the value of the option premium would
Solution
Increase.
The strike price (K) is the price at which the holder of the option can sell the asset. If the strike price is higher, it means the holder can sell the asset at a higher price, which makes the option more valuable. Therefore, the premium, which is the price to buy the option, would increase.
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