Provide a brief explanation of the factors that affect the price of a call option.

1.<Tab/>Provide a brief explanation of the factors that affect the price of a call option. A call option is basically an option of buying a fixed asset at a fixed price before a given date. These assets can come in the form of different financial assets such as bonds, securities and shares. The rate at which you buy the asset is the premium. If you were to buy an asset …

…as you are paying less than the national interest rate, but if the Bank of England were to raise it to 3%, then no profit is made. People are now unhappy to pay the same price for the bond as they were before so the bond price goes down. Hence the inverse relationship, if the interest rates drop and more money can be made, then it makes sense that the price of the bond goes up.