Question

The value of any option (both call and put options) is positively related to the

1. I) volatility of the underlying stock price;
2. II) time to expiration;
3. III) risk-free rate;

Multiple Choice

• I and II only

• II and III only

• I and III only

• III only

Answer 1

The value of any option (both call and put options) is positively related to the

1. volatility of the underlying stock price. Higher the volatility, higher is the option price of both call and put. And, vice versa.
2. time to expiration. Longer the time to expiry, higher is the option price of both call and put. And, vice versa.

If risk-free rate increases, call option price increases and put option price decreases. So, the prices of call and put options are negatively related.

The correct answer is I and II only

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