The option on Microsoft stock described in Application 4.4: Puts, Calls, and Black-Scholesgave the owner the right to buy one share at $32 one month from now. Microsoft currently sells for $30 per share, and investors believe there is a 50-50 chance that it could become either $35 or $25 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 $32 to $33, affect the value of the option?
(b) How would an increase in the current price of Microsoft stock, from $30 to $31 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 $40 or $20, 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?