If the interest rate is positive, then which of the following statements is valid for at-the-money call and put options written on the same underlying stock for the same strike and maturity?
A) The call is worth more than the put.
B) The call price is equal to the put price.
C) The call price is less than the put price.
D) More information is needed to determine the relative values of the call and put.

Question

Quizplus · Accepted Answer

When the interest rate is positive, the value of money today is more than the value of money in the future. For at-the-money call and put options with the same strike price and maturity, the call option is worth more because it allows the investor to benefit from the stock's potential appreciation without having to invest the full amount upfront, unlike the put option which is a right to sell. This is explained by the cost of carry model, which factors in the interest rates when pricing options.

If the Interest Rate Is Positive, Then Which of the Following