Problem
The option on Microsoft stock described in Application gave the owner the right to buy one share at $27 one month from now. Microsoft currently sells for $25 per share, and investors believe there is a 50-50 chance that it could become either $30 or $20 in one month. Now let's see how various features of this option affect its value:
a. How would an increase in the strike price of the option, from $27 to $28, affect the value of the option?
b. How would an increase in the current price of Microsoft stock, from $25 to $27 per share, affect the value of the original option?
c. How would an increase in the volatility of Microsoft stock, so that there was a 50-50 chance that it could sell for either $32 or $18, affect the value of the original option?
d. How would a change in the interest rate affect the value of the original option? Is this an unrealistic feature of this example? How would you make it more realistic?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.