FRM Part I · FRM Exam Part I · Properties of Options
Which of the following best describes the effect of an increase in the strike price, holding other factors constant, on European option values?
A higher strike price lowers the value of a call and raises the value of a put. The call payoff, stock price minus strike, shrinks as the strike rises, whereas the put payoff, strike minus stock price, grows.
- ACall value increases and put value decreases
- BCall value decreases and put value increasesCorrect
- CBoth call and put values increase
- DBoth call and put values decrease
Explanation
A higher strike means the call is paid less in the money (payoff max(S-K,0) falls), while the put payoff max(K-S,0) rises. Hence calls fall and puts rise. The other options mismatch the direction for at least one type.
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