CFA CFA Level 1 CFA Level 1 Question of the Week – Derivatives

CFA Level 1 Question of the Week – Derivatives

  • Author
    Posts
  • Matt_AnalystPrep
    Participant
    Up
    1
    Down

    What is the most likely result of a decrease in the risk-free rate of return on put and call option prices?

    • A. Put and call option prices will increase.
    • B. Put option prices will decrease and call option prices will increase.
    • C. Put option prices will increase and call option prices will decrease.
    Matt_AnalystPrep
    Participant
    Up
    3
    Down

    The correct answer is C.

    The result of a decrease in the risk-free rate of interest will increase put option prices and decrease call option prices.

    A call option can be looked at as the right to delay a purchase.  The higher the interest rate you can earn on the cash you will use to make that purchase, the greater the benefit of being able to delay that purchase.

    A put option can be looked at as the right to delay a sale.  The higher interest rate you can earn on the cash generated from that sale, the less desirable it is to delay that sale.

Viewing 2 posts - 1 through 2 (of 2 total)
  • You must be logged in to reply to this topic.