In the Black-Scholes option pricing model, an increase in the risk-free rate (RFR) will cause
A) In the Black-Scholes option pricing model, an increase in the risk-free rate (RFR) will cause
B) an increase in call value and a decrease in put value.
C) a decrease in call value and an increase in put value.
D) a decrease in call value and a decrease in put value.
E) an increase in call value and an increase or decrease in put value.

Question

Quizplus · Accepted Answer

In the Black-Scholes model, an increase in the risk-free rate makes holding cash more attractive, which increases the value of call options (since they offer leverage on the underlying asset without the need to invest the full price) and decreases the value of put options (since the cost of hedging or the opportunity cost of holding the underlying asset increases).

In the Black-Scholes Option Pricing Model, an Increase in the Risk-Free