Option Price vs. Volatility question
Naeron Joined 5; 5
I was drawing some graphs for the plain vanilla european options. Here is one of the graphs I got:
EUROPEAN CALL
K=$50, T = 1 year, r=5%
OTM: S(0)=$40
ATM: S(0)=$50
ITM: S(0)=$60
The question is why ATM option has value when volatility sigma=0 ? I mean what is the financial interpretation of this fact? However, similar graph for the ATM European Put starts from 0.
EUROPEAN PUT
S(0)=$50, K=$50, T=1, r=5%
EUROPEAN CALL
K=$50, T = 1 year, r=5%
OTM: S(0)=$40
ATM: S(0)=$50
ITM: S(0)=$60
The question.