FRM Part I · FRM Exam Part I · Options Markets
All else equal, which of the following changes would increase the value of a European put option on a non-dividend-paying stock?
An increase in the strike price raises a European put's value, because the put pays the strike minus the stock price when exercised. Higher stock prices, lower volatility, or a lower strike would each reduce the put's value or expected payoff.
- AA decrease in the stock's volatility
- BAn increase in the stock price
- CAn increase in the strike priceCorrect
- DA decrease in the strike price
Explanation
A put pays max(K - S, 0), so a higher strike raises its payoff and value. A higher stock price lowers put value, and lower volatility reduces the value of any option. A lower strike also reduces the put's payoff.
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