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CFA Level 1 Question of the Week - Derivatives

Matt_AnalystPrepMatt_AnalystPrep MontrealPosts: 27 Associate
edited May 23 in CFA Practice Questions
What is the most likely result of a decrease in the risk-free rate of return on put and call option prices?
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CFA Level 1 Question of the Week - Derivatives 5 votes

A. Put and call option prices will increase.
0% 0 votes
B. Put option prices will decrease and call option prices will increase.
20% 1 vote
C. Put option prices will increase and call option prices will decrease.
80% 4 votes

Comments

  • Matt_AnalystPrepMatt_AnalystPrep MontrealPosts: 27 Associate
    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.
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