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CFA Level I · CFA Level I Exam · Pricing and Valuation of Options

Other factors constant, a longer time to expiration will most likely:

A longer time to expiration most likely increases the value of a European call on a non-dividend-paying stock, because there is more time for the price to rise and the exercise price is deferred. American options never lose value with time, and European puts can fall.

  1. Aincrease the value of a European call on a non-dividend-paying stockCorrect
  2. Bdecrease the value of an American call on a non-dividend-paying stock
  3. Cincrease the value of a European put in every circumstance

Explanation

More time raises the chance of a favorable move and, for calls, increases the interest earned on the deferred exercise price, so a non-dividend European call rises in value. An American option can never be worth less with more time. A European put can fall in value when deeply in the money, so it does not rise in every circumstance.

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