Explanation:
The value of a call option rises as the value of the underlying security rises. A decrease in the risk-free rate will make puts on stocks more valuable. Volatility and option values move in the same direction. As volatility increases, options increase in value. As volatility decreases, options decrease in value. Dividends are not paid to option buyers. Stock prices decrease when a dividend is paid, which translates into a decline in the value of a call option.
(Book 3, Module 39.1, LO 39.a)
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Question 29
Which of the following statements regarding the relationship between option prices and movement in the price of the underlying security is correct?
A
As the current stock price increases, the value of a call option decreases.
B
As the value of the risk-free rate decreases, the value of a put will increase.
C
As the volatility of the underlying security decreases, the value of a call option increases.
D
As the dividend on the underlying stock increases, the value of a call option will also increase.
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