In the Black-Scholes option pricing model, an increase in security price (S) will cause
A) An increase in call value and an increase in put value
B) An increase in call value and a decrease in put value
C) An decrease in call value and an increase in put value
D) An 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

According to the Black-Scholes option pricing model, as the price of the underlying asset S increases, the value of call options will also increase due to the increased likelihood of the option being exercised at a higher price. On the other hand, the value of put options will decrease as there is a reduced likelihood of the option being exercised at a lower price. Therefore, an increase in security price will cause an increase in call value and a decrease in put value.

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