The greater the variability of a currency, the ____ will be the premium of a call option on this currency, and the ____ will be the premium of a put option on this currency, other things equal.
A) greater; lower
B) greater; greater
C) lower; greater
D) lower; lower

Question

Quizplus · Accepted Answer

The greater the variability of a currency, the more likely it is to move in price, making it more valuable to own the option. This would increase the premium of a call option on the currency. On the other hand, the greater variability also means that the chances of the currency depreciating are also higher, thereby increasing the premium of a put option. Therefore, the premium of a call option on this currency will be greater, and the premium of a put option on this currency will also be greater.

The Greater the Variability of a Currency, the ____ Will