Skip to content

CA Final · Advanced Financial Management · Derivatives Analysis and Valuation

Under the Black-Scholes model for a European call option on a non-dividend-paying share, all other inputs remaining unchanged, an increase in which input will reduce the theoretical value of the call?

The exercise price. A higher strike means the call holder pays more to acquire the share, which lowers the call's value. Higher spot price, volatility and risk-free rate each raise the Black-Scholes value of a European call on a non-dividend share.

  1. ACurrent spot price of the share
  2. BVolatility of the share's returns
  3. CExercise price of the optionCorrect
  4. DRisk-free rate of interest

Explanation

A higher exercise price means the holder must pay more to buy the share, so the call becomes less valuable. Higher spot price, higher volatility and a higher risk-free rate all increase 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