Skip to content

FRM Part I · FRM Exam Part I · Options Markets

Holding all other inputs constant, which change would increase the value of a European put option on a non-dividend-paying stock?

An increase in the stock's volatility raises the value of a European put. Greater volatility increases the chance of large favorable moves while the loss is limited to the premium. A higher interest rate reduces put values, and a lower volatility also reduces them.

  1. AA decrease in the stock's volatility
  2. BAn increase in the risk-free interest rate
  3. CAn increase in the stock's volatilityCorrect
  4. DA decrease in the time to expiry for a deep out-of-the-money put

Explanation

Higher volatility widens the distribution of terminal prices, and since the option payoff is floored at zero, the holder gains from the larger downside tail without bearing symmetric losses. So both calls and puts increase in value with volatility. A higher risk-free rate lowers put value because the present value of the strike falls.

Did you get it right without looking?

One question tells you little. A timed set on Options Markets shows your real accuracy, how long you take and where you lose marks.

Practise Options MarketsFree diagnostic mock

More Options Markets questions