230k views
1 vote
The value of a call option decreases when which of the following increases?

a. the strike price
b. inflation
c. implied volatility
d. gross domestic product
e. the risk-free rate

User LDJ
by
8.2k points

1 Answer

5 votes

Final answer:

The value of a call option typically decreases with lowering implied volatility but increases with a rise in the risk-free rate. Meanwhile, in the financial market, interest rates typically decline when there is a rise in the money supply.

Step-by-step explanation:

The value of a call option typically decreases when the implied volatility decreases. When there is lower volatility, the probability that the option will end up in-the-money (that is, with a stock price above the strike price for calls) is reduced, thus the option becomes less valuable. On the other hand, when the risk-free rate increases, the value of a call option usually increases as well because the present value of the exercise price is discounted at a higher rate, making it cheaper in present value terms and increasing the value of the option.

In the context of financial market changes, a rise in the supply of money, ceteris paribus (all other things being equal), would lead to a decline in interest rates. When there's more supply of a financial commodity like money available for borrowing, the price of borrowing that money (which is the interest rate) tends to go down.

User TyMarc
by
8.0k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.