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The Theta of an option is defined as: A. expected change in the option premium for a small change in volatility. B. expected change in the option premium for a small change in the spot rate. C. expected change in the option premium for a small change in time to expiration. D. expected change in the option premium for a small change in the domestic interest rate.

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Answer: C. expected change in the option premium for a small change in time to expiration

Explanation: The theta of an option is simply defined as the expected change in the option premium for a small change in time to expiration. When all other variables are kept constant, options generally will lose value the closer it gets to its maturity as such, theta of options measure the rate of decline or decay in the value of an option due to the passage of time (quantifies the risk that time poses to option buyers) and is expressed as a negative value.

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