In the Black-Scholes option pricing model, an increase in exercise price (X) 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 model, an increase in exercise price (X) will decrease the value of a call option and increase the value of a put option. This is because a higher exercise price makes it less likely for the underlying asset to reach the strike price, meaning the call option is worth less, while a higher exercise price makes it more likely for the underlying asset to fall below the strike price, meaning the put option is worth more. Therefore, the correct choice is (C) An decrease in call value and an increase in put value.

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