dividends on the stock in subsequent periods. Failing to
exercise the option will mean that these dividends are
forgone.
4.Strikepriceofoption.Akeycharacteristicusedtodescribe
anoptionisthestrikeprice.Inthecaseofcalls,wherethe
holderacquirestherighttobuyatafixedprice,thevalueof
thecallwilldeclineasthestrikepriceincreases.Inthecaseof
puts,wheretheholderhastherighttosellatafixedprice,the
value will increase as the strike price increases.
5.Timetoexpirationonoption.Bothcallsandputsbecome
less valuable as the time to expiration decreases. This is
becausetheshortertimetoexpirationprovideslesstimefor
the value of theunderlying asset to move, decreasing the
valueofbothtypesofoptions.Additionally,inthecaseofa
call,wherethebuyerhastopayafixedpriceatexpiration,the
presentvalueofthisfixedpriceincreasesasthelifeofthe
option decreases, decreasing the value of the call.
6.Risklessinterestratecorrespondingtolifeofoption.Since
thebuyerofanoptionpaysthepriceoftheoptionupfront,an
opportunity cost isinvolved. This cost willdependon the
levelofinterestratesandthetimetoexpirationontheoption.
The riskless interest rate also enters into the valuation of
options when the present value of the exercise price is
calculated,sincetheexercisepricedoesnothavetobepaidor
received until expiration of the option. Increases in the
interestrate willincrease thevalueofcallsand reducethe
value of puts.
Table A12.1summarizes the variables and their predicted
effects on call and put prices.