The correct answer is: A. price of an option
The price of an option is dependent on the variability of the stock price, the option term to maturity, and the risk free rate.
The variability of the stock price is a measure of how much the stock price is expected to fluctuate. A higher volatility means that the stock price is more likely to move up or down in a short period of time. This makes options more valuable, because there is a greater chance that the option will be in the money at expiration.
The option term to maturity is the length of time that the option is valid. A longer term option is more valuable than a shorter term option, because there is more time for the stock price to move in a way that is favorable to the option holder.
The risk free rate is the interest rate that can be earned on a risk-free investment. A higher risk free rate means that the option holder has to be compensated for the opportunity cost of not investing in a risk-free asset. This makes options less valuable, because the option holder has to give up a higher return on a risk-free investment in order to hold the option.
The other options are not dependent on the variability of stock price, option term to maturity, and risk free rate.
- Expiry of an option is the date on which the option expires. The price of an option is not dependent on the expiry date, because the option holder can always sell the option before it expires.
- Exercise of an option is the process of taking ownership of the underlying asset. The price of an option is not dependent on whether or not the option is exercised, because the option holder can always sell the option before it expires.
- Estimation of an option is the process of determining the price of an option. The price of an option is dependent on the variability of the stock price, the option term to maturity, and the risk free rate, but it is not dependent on the method used to estimate the price of the option.