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For call options
1. current share price- if the current share price is higher than the excercise price. Then the premium will be higher because there is more demand to that option. Is this correct?
2. can you explain why risk free rate is one of the factors on influencing price of the premium. I wasn’t able to grasp the concept from the lecture video. Thank you sir1 Correct
2 Because it is used to discount given that the exercise date is some time in the future.
sir for no 2 I am not able to understand can you perhaps give an small example . Thank you in advance.
I do work through examples calculating the option premium using the BSOP formula, and the risk free rate of interest is one of the terms that is used in the formula.
Obviously you are not expected these days to be able to use the formula because when needed you are given a special spreadsheet that calculates it for you – you just put in the relevant numbers. In my examples I do work through the formula because it is still important to understand the various factors that affect the premium.
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