In the Black-Scholes option pricing model, an increase in the risk free rate (RFR) 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, an increase in the risk-free rate (RFR) will increase the present value of the strike price, resulting in an increase in call value. At the same time, the increase in RFR will increase the cost of carry, which will reduce the present value of the put premium, resulting in a decrease in put value. Therefore, the correct choice is B: An increase in call value and a decrease in put value.

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