{"id":59767,"date":"2024-04-16T01:43:02","date_gmt":"2024-04-16T01:43:02","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=59767"},"modified":"2024-04-16T01:43:02","modified_gmt":"2024-04-16T01:43:02","slug":"in-an-option-pricing-a-rises-in-risk-free-rate-results-in-options-value","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/in-an-option-pricing-a-rises-in-risk-free-rate-results-in-options-value\/","title":{"rendered":"In an option pricing, a rises in risk free rate results in option’s value"},"content":{"rendered":"

[amp_mcq option1=”slight time decreases” option2=”slight increases” option3=”slight decreases” option4=”slight time increases” correct=”option2″]<\/p>\n

The correct answer is: B. slight increases.<\/p>\n

A rise in the risk-free rate will increase the value of a call option and decrease the value of a put option. This is because a higher risk-free rate makes it more expensive to borrow money, which in turn makes it more expensive to exercise a put option. It also makes it more attractive to hold a call option, as the potential payoff is greater.<\/p>\n

Option pricing models take into account a number of factors, including the strike price, the underlying asset price, the time to expiration, the volatility of the underlying asset, and the risk-free rate. A rise in the risk-free rate will affect the value of an option by increasing the discount rate used to calculate the present value of the option’s payoff. This will make the option more valuable, as the present value of a future payoff is higher when the discount rate is lower.<\/p>\n

The following is a brief explanation of each option:<\/p>\n