FRM Part I · FRM Exam Part I · Properties of Options
Holding all other factors constant, which change would most clearly increase the value of a European call option on a non-dividend-paying stock?
An increase in the risk-free rate raises a European call's value because it lowers the present value of the strike price to be paid at expiry. Lower volatility and a higher strike reduce call value, and shorter time to expiry typically reduces it too.
- AA decrease in the stock's volatility
- BAn increase in the risk-free interest rateCorrect
- CA decrease in the time to expiration
- DAn increase in the strike price
Explanation
A higher risk-free rate reduces the present value of the strike paid at exercise, which raises call value. Lower volatility, a higher strike, and less time (for a non-dividend stock, European call time value generally falls) all reduce or do not raise value.
Did you get it right without looking?
One question tells you little. A timed set on Properties of Options shows your real accuracy, how long you take and where you lose marks.
More Properties of Options questions
- A trader holds an American call option on a non-dividend-paying stock. Which statement about early exercise of this call before expiry is co…
- A trader holds an American call option on a stock that pays no dividends during the life of the option. Which statement about early exercise…
- An American put on a non-dividend-paying stock has strike 50. The stock price has fallen to 2 and the risk-free rate is 6% per year. Which s…
- An analyst holds a long European call and a short European put on a non-dividend-paying stock, both with the same strike K and expiry T. Whi…
- A non-dividend-paying stock trades at 48. A European call with strike 50 and one year to expiry is priced at 3.50. The continuously compound…
- A European put has strike USD 60 and six months to expiry on a stock priced at USD 55 that pays no dividends. The risk-free rate is 4% conti…