CFA CFA Level 1 Int rate increase and decrease with options

Int rate increase and decrease with options

  • This topic has 1 reply, 2 voices, and was last updated Feb-21 by fp92.
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    • pcunniff
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      Hello everyone! Does anyone know a trick to remember the relationships with int rate increases and the value of put/call options??

      The value of a put option on a stock trading at 35 will decrease when:

      A)

      the risk-free rate is higher.

      B)

      the volatility of the stock price is higher.

      C)

      the dividends paid on the stock are higher.

    • fp92
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      interesting, did you choose C by any chance as I would have? Because I’d have thought increase in dividends decreases the stock value by the same amount, therefore decreasing the value of put option.

      Whilst I get that higher risk-free rate also reduces the put option value, but the extent of that would be minimal compared to reductio in underlying stock price. Hence by answer choice of C.

      Did the question offer any good explanation?

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