{"id":58154,"date":"2024-04-16T01:14:30","date_gmt":"2024-04-16T01:14:30","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=58154"},"modified":"2024-04-16T01:14:30","modified_gmt":"2024-04-16T01:14:30","slug":"an-increase-in-value-of-option-leads-to-low-present-value-of-exercise-cost-only-if-it-has","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/an-increase-in-value-of-option-leads-to-low-present-value-of-exercise-cost-only-if-it-has\/","title":{"rendered":"An increase in value of option leads to low present value of exercise cost only if it has"},"content":{"rendered":"

[amp_mcq option1=”low volatility” option2=”interest rates are high” option3=”interest rates are low” option4=”high volatility” correct=”option4″]<\/p>\n

The correct answer is: D. high volatility<\/strong><\/p>\n

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date. The price at which the option can be exercised is called the strike price. The price paid for the option is called the premium.<\/p>\n

The value of an option depends on a number of factors, including the strike price, the underlying asset price, the time to expiration, interest rates, and volatility.<\/p>\n

Volatility is a measure of how much the price of the underlying asset is expected to fluctuate. A high-volatility asset is one whose price is expected to fluctuate a lot. A low-volatility asset is one whose price is expected to fluctuate very little.<\/p>\n

The value of an option increases with volatility. This is because a high-volatility asset is more likely to reach the strike price before expiration, which gives the option holder a greater chance of making a profit.<\/p>\n

For example, consider an option to buy a share of stock at $50 per share. The stock is currently trading at $40 per share. The option premium is $5.<\/p>\n

If the stock price remains at $40 per share, the option will expire worthless and the option holder will lose the $5 premium.<\/p>\n

However, if the stock price rises to $55 per share, the option holder can exercise the option and buy the stock at $50 per share. The option holder can then sell the stock at the market price of $55 per share, making a profit of $5.<\/p>\n

The higher the volatility of the stock, the more likely it is that the stock price will reach the strike price before expiration. This means that a high-volatility stock option is more valuable than a low-volatility stock option.<\/p>\n

In conclusion, an increase in value of option leads to low present value of exercise cost only if it has high volatility<\/strong>.<\/p>\n","protected":false},"excerpt":{"rendered":"

[amp_mcq option1=”low volatility” option2=”interest rates are high” option3=”interest rates are low” option4=”high volatility” correct=”option4″]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[945],"tags":[],"class_list":["post-58154","post","type-post","status-publish","format-standard","hentry","category-financial-management","no-featured-image-padding"],"yoast_head":"\nAn increase in value of option leads to low present value of exercise cost only if it has<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/exam.pscnotes.com\/mcq\/an-increase-in-value-of-option-leads-to-low-present-value-of-exercise-cost-only-if-it-has\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" 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