The premium of a currency put option should decrease if:
A) the volatility of the underlying asset increases.
B) the spot rate increases.
C) the volatility of the underlying asset increases and the spot rate increases.
D) None of these are correct.

Question

Quizplus · Accepted Answer

The premium of a currency put option gives the buyer the right (but not the obligation) to sell the underlying currency at a fixed strike price, regardless of the spot rate at the time of expiration. Therefore, if the spot rate increases, it becomes less likely that the buyer of the put option will exercise their right to sell at the lower strike price, and the premium should decrease. The volatility of the underlying asset is not necessarily related to the direction of the spot rate, and its effect on the premium is more complex. Therefore, A and C are incorrect. D is clearly incorrect, as one of the options must be correct.

The Premium of a Currency Put Option Should Decrease If