Financial Risk Manager Part 1

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Explanation:

The false statement is D.

A is true: A lower risk-free rate increases the present value of the strike, which makes puts more valuable.
B is true: A lower risk-free rate generally reduces call value because the PV of the strike is higher.
C is true: When interest rates fall to zero, the benefit from early exercise is reduced for both calls and puts, so early exercise becomes less attractive.
D is false: For European options on a dividend-paying stock, the lower bound does not simply become intrinsic value when the risk-free rate is zero.
- For a European call, the lower bound is: $\max(0, S - PV(D) - K)$
- For a European put, the lower bound is: $\max(0, K + PV(D) - S)$
These include dividends and do not reduce to intrinsic value unless dividends are zero.

Question-726.2. Assume an option has a strike price of `$50.00` and its time to expiration is six months (0.5 years) while the stock pays a dividend. Each of the following implications is true, ceteris paribus, if the risk-free rate reduces from 3.0% to zero EXCEPT which is FALSE if the risk-free rate reduces to zero?

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If the option is put (either American or European), its price will increase

20.0%

If the option is a call (either American or European), its price will decrease

0.0%

If the option is American (either a call or a put), the early exercise feature becomes relatively LESS attractive

40.0%

If the option is European (either a call or a put), the lower bound (aka, minimum value) simplifies to the option's intrinsic value

40.0%