Consider a one-year, at-the-money call option on Taggart stock. The effect on the price of this call option of an increase in the risk-free rate from 4% to 6% is closest to:
A) $0.50 decrease
B) $0.50 increase
C) $0.70 decrease
D) $0.80 increase

Question

Quizplus · Accepted Answer

An increase in the risk-free rate generally increases the price of a call option. This is because the present value of the exercise price decreases, making the call option more valuable.

Consider a One-Year, At-The-Money Call Option on Taggart Stock