Skip to content

FRM Part I · FRM Exam Part I · Option Sensitivity Measures: The "Greeks"

A European put option on a non-dividend-paying stock is deep in the money, and the risk-free interest rate is high. Which statement about its theta is most accurate?

A deep in-the-money European put on a non-dividend stock can have positive theta when rates are high. As time passes, the present value of the strike increases because there is less discounting, which can raise the option's value despite shrinking time value.

  1. ATheta can be positive because the present value of the strike rises as time passesCorrect
  2. BTheta must be negative for every European put
  3. CTheta is always zero for deep in-the-money puts
  4. DTheta is always larger in absolute value than for an at-the-money put

Explanation

For a deep in-the-money European put, the main component of value is the discounted strike. As time passes, discounting lessens and the present value of the strike rises, so the value of the put can increase and theta can be positive. Statements claiming it must always be negative or zero ignore this effect.

Did you get it right without looking?

One question tells you little. A timed set on Option Sensitivity Measures: The "Greeks" shows your real accuracy, how long you take and where you lose marks.

Practise Option Sensitivity Measures: The "Greeks"Free diagnostic mock

More Option Sensitivity Measures: The "Greeks" questions