Practical Financial Management
Investing in financial and real assets by individuals and firms enables them to earn profits in future. Clearly, businesses that deal with security, stock and financial assets consider option pricing before they decide to trade. The advantages of options are that they allow stock holders to buy and sell basic assets. In this regard, there are vital variables that determine the outcome of pricing alternatives.
For instance, security price is a variable that enhances call option price. If an option is sold at a fixed price that is high, the holder will be willing to buy it at an increased cost. Factors that impact alternative pricing depend on the life span of the expiration period. According to the Black-Scholes approach, the returns rates of stock are circulated in a continuous way. As a result, the outcome stock is considered to be constant (Hitchner, 2010). Before the date of expiry, an option adds value. Traders are supposed to be ready because industries will take a long duration to note trends at the market.
This means that an option that takes few days to expire is not valuable contrasted to that that take moths. At the market, aspects such as demand and supply influence pricing options. A good example applies to products that are on huge demand. This subjects their stock prices to increase. Volatility or instability at the market is another factor that influences option pricing. In this context, costs will rise with an objective of increasing profits in future.
Evidently, volatile stocks are beneficial in contrast to dominant shares. Furthermore, the rates of interests on essential assets have an impact on option pricing. Despite all this, firms decide to venture on trade deals that are associated to risks. Managers need to find out variables that have an impact on price option in trade.
Beaton, N. J. (2013). Valuing early stage and venture backed companies. Hoboken, N.J: Wiley.
Hitchner, J. R. (2010). Financial valuation: Applications and models. Hoboken, N.J: Wiley
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