The premium of a currency put option should increase 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 should increase if the volatility of the underlying asset increases because a higher volatility increases the chances of the option being in-the-money at expiration. The spot rate and put option premiums have an inverse relationship, therefore the spot rate increasing would decrease the put option premium. The combination of both an increase in volatility and spot rate is not a correct answer.

The Premium of a Currency Put Option Should Increase If