All else the same, an increase in the risk-free rate will __________ the price of a call option and __________ the price of a put option.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
E) not affect; not affect

Question

Quizplus · Accepted Answer

An increase in the risk-free rate will increase the cost of carrying the underlying asset and therefore decrease the present value of an option’s exercise price. This will decrease the price of a call option as the exercise price is more expensive, but it will increase the price of a put option as the exercise price is less expensive.

All Else the Same, an Increase in the Risk-Free Rate