q7 April 2005

Discussion in 'CT8' started by r_v.s, Mar 29, 2014.

  1. r_v.s

    r_v.s Member

    Unless a call option is deep in the money, the drop in price of the option will be
    less than proportional to the share price and hence some combination of the
    following must also have occurred:
    dividends increased
    share price volatility decreased
    risk free interest rate decreased

    But isn't it true that "drop in price of the option will be less than proportional to the share price"for a call option always? Delta is always less than 1, isn't it?

    Also, this may sound a bit silly:( , but does question(ii) mean - state some reasons why the option price has fallen from 1st to 2nd?
     
    Last edited by a moderator: Apr 4, 2014
    r_v.s, Mar 29, 2014
    #1
  2. John Potter

    John Potter ActEd Tutor Staff Member

    'But isn't it true that "drop in price of the option will be less than proportional to the share price"for a call option always?'

    Yes, that's why the solution says that something else must have occurred because, in this case, the drop in price of the option IS proportional to the share price.

    Your silly question at the end, is not silly at all. This is exactly what te question is effectively asking.

    John
     
    John Potter, Apr 4, 2014
    #2

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