Skip to content

CA Final · Advanced Financial Management · Derivatives Analysis and Valuation

Under the Black-Scholes model for a European call on a non-dividend-paying share, all other inputs remaining unchanged, which one of the following changes would REDUCE the value of the call option?

A higher exercise price reduces the Black-Scholes value of a European call. The holder must pay more to acquire the share, so the payoff shrinks and the present value of the strike rises in the formula. Higher spot, volatility and interest rates all increase call value.

  1. AAn increase in the current spot price of the share
  2. BAn increase in the expected volatility of the share
  3. CAn increase in the exercise price of the optionCorrect
  4. DAn increase in the risk-free rate of interest

Explanation

A call pays off when spot exceeds the exercise price, so a higher exercise price lowers its value. A higher spot price, higher volatility and a higher risk-free rate (which lowers the present value of the strike) all raise the call value in the model.

Did you get it right without looking?

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

Practise Derivatives Analysis and ValuationFree diagnostic mock

More Derivatives Analysis and Valuation questions