Derivatives - Derivatives Section 2
| Risk-Free | Rate Volatility | |
| A. | increase | Decrease |
| B. | Decrease | Decrease |
| C. | Decrease | Increase |
- Option : A
- Explanation : Lower volatility on the underlying decreases the option’s value for both puts and calls. Increase in risk free rate increases the value of a call option but reduces the value of a put option.
52. Which of the following will most likely cause a European put option to be worth less?
- Option : B
- Explanation : A decrease in the risk free rate will cause a put option to be worth more. A decrease in time to maturity will generally cause a put option to be worth less. A decrease in the price of the underlying will cause the put option price to increase. The best option is B.
54. At expiration, an American call option will be valuable if the underlying price is:
- Option : C
- Explanation : At expiration, an American call option will be valuable if the underlying price is greater than the exercise price.
55. According to put-call parity, which of the following relationships hold?
- Option : C
- Explanation : The put and underlying make up a protective put, while the call and present value of the exercise price make up a fiduciary call.
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