Question

The magnitude of the premium will change as both the securities value, and remaining time to maturity changes.

A. Decrease
B. Increase
C. Remain constant
D. Fluctuate

Answer 1

B. Increase.The option premium will increase as the value of the underlying security rises and as the time to maturity extends. Conversely, a decrease in the underlying security's value or a shorter time to maturity generally leads to a lower option premium. Thus, the premium fluctuates in response to changes in these key factors.

Step-by-step explanation:

The premium of an option is a dynamic component influenced by the ever-changing dynamics of the financial markets. As the value of the underlying security fluctuates, the premium experiences corresponding adjustments. When the underlying security's value increases, the option premium tends to rise as well. This is because the potential profit for the option holder also increases, reflecting the heightened likelihood of the option being exercised profitably.

Similarly, the time remaining until the option's maturity plays a crucial role in determining its premium. As time progresses, the remaining time to maturity decreases. This temporal aspect introduces an element of risk for option holders, as there is less time for the underlying security's value to move in a favorable direction. Consequently, a longer time to maturity generally results in a higher option premium, reflecting the extended window of opportunity for the option to become profitable.

In summary, the option premium is not a static entity but a dynamic one that responds to changes in both the underlying security's value and the remaining time to maturity. An increase in either factor typically leads to an increase in the option premium, emphasizing the interconnected nature of these variables in options pricing.

Answer 2

In the statement "The magnitude of the premium will change as both the securities value, and the remaining time to maturity changes", the correct answer is D. Fluctuate

Step-by-step explanation:

The statement indicates that the magnitude of the premium is influenced by both the security's value and the remaining time to maturity. This suggests a dynamic relationship where the premium is not fixed but rather subject to changes.

Premiums for options are influenced by various factors, including the underlying security price and the time remaining until the option expires. As the security's value changes, the option premium may increase or decrease based on the direction of the security's movement. Additionally, the remaining time to maturity plays a crucial role; as time elapses, the premium might change in response to the diminishing time value of the option. The interplay of these factors results in a premium that is not constant but rather subject to fluctuations.

Understanding this dynamic nature is crucial for investors and traders in the options market. They must be aware that premiums can be affected by market conditions and the passage of time, requiring them to make informed decisions based on a comprehensive analysis of these variables. "Fluctuate" option is reflecting the variable nature of option premiums in response to changes in security value and time to maturity. Therefore, the appropriate choice is D. Fluctuate.