Final answer:
In the Black-Scholes model, an increase in the risk-free rate leads to an increase in call value but a decrease in put value. The financial market experiences an increase in the quantity of loans when there is a rise in demand or supply. Interest rates decline typically when there is a rise in the supply of loans. C. A decrease in call value and an increase in put value
Step-by-step explanation:
In the Black-Scholes option pricing model, the effect of an increase in the risk-free rate impacts call and put option values differently. An increase in the risk-free rate will result in an increase in the value of call options. This occurs because the cost of carrying or holding an underlying asset is higher, which is reflected in call option prices. Conversely, the value of put options will typically decrease with an increase in the risk-free rate. This is due to the fact that the benefit from holding cash, which earns the risk-free rate, becomes more appealing compared to holding the declining asset. Therefore, the correct answer is B. An increase in call value and a decrease in put value.
Regarding changes in the financial market that lead to an increase in the quantity of loans made and received, both a rise in demand for loans and a rise in supply of loans can cause such an increase. Specifically, a rise in demand indicates that more borrowers are interested in taking out loans, which can increase the quantity of loans made. Conversely, a rise in supply means that there are more funds available from lenders, which can also lead to more loans being granted. The correct answer here is both A. a rise in demand and C. a rise in supply.
As for the changes that will lead to a decline in interest rates, a fall in demand for loans can lead to lower interest rates, as lenders may lower rates to attract more borrowers. However, a more significant impact on interest rates often comes from a rise in the supply of loans, as an excess of available funds tends to decrease the cost of borrowing money, which is reflected in lower interest rates. Hence, the correct answer is C. a rise in supply.