Question

10. Which of the following statements regarding factors that affect call option prices is CORRECT?

	a.		The longer the time until the call option expires the smaller its value and the smaller its premium.
	b.		An option on an extremely volatile stock is worth less than one on a very stable stock.
	c.		The price of a call option increases as the risk-free rate increases.
	d.		Two call options on the same stock will have the same value even if they have different strike prices.
	e.		If you observe that a put option on a stock increases in value, then a call option on that same stock also increases in value.

Answer 1

a. This is not true since if the time until expiration is longer , the option price would be higher.

b. This is not true as if the expected volatility is higher, the option value will be higher since there are greater price fluctuations.

c. This is true since the price of a call option increases as the risk-free rate increases.

d. This is not true since when the strike price becomes more favorable compared to the current underlying price, the premium on the option increases.Hence two call options on same stock will not have same value if they have different strike prices.

e. This is not true since if underlying price increases, then call option price increases and put option price decreases and vice - versa.