CFA Level 1 Question of the Week – Derivatives

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.