Properties of Stock Options

[sucheta_isi]

David,

From HULL, in the chapter on Properties of Options there is a table , which shows the effect on the price of STOCK option of increasing one variable(e.g. Current Stock price, strike price, interest rate etc. ) while keeping others constant.


My question is for BOND or any other fixed income security DO WE have the SAME table work????

 

[David Harper CFA FRM]

sray,

Not really. The option under BSM has the inputs as risk factors, so an option is complex in the sense it has 5-6 risk factors.
But the FRM tends to treat the bond only in regard to the interest rate risk factor. Of course there are details around that one risk factor; e.g., is it yield (YTM), forward rate or spot rate .... and often, the assumption is yield (e.g., DV01). So, often, the focus is simply: higher yield (YTM) implies lower bond price.
.. but note bond has a term also, just like option (T)

so just as the option risk factors following from the option pricing model; i.e., c = BSM [stock, strike, ...]

the most basic bond pricing model is given by zero coupon continuous compound:
price = face * EXP[-rT]
... you can see here there are only 2 inputs: yield and term.

David