Last week, Alfonso purchased a three-month put option on shares of DOG stock. This week DOG shares declined in price and the rate on Treasury bills also declined. As a result of these two events, with all else constant, the value of Alfonso's options:
A) Increased in value as a result of both events.
B) Decreased in value as a result of both events.
C) Increased in value due to the decline in the market value of DOG stock but was unaffected by the change in the Treasury bill rate.
D) Decreased in value due to the decline in the market value of DOG stock but increased in value from the change in the Treasury bill rate.
E) Changed in value but the direction of the change cannot be determined from the information provided.

Question

Quizplus · Accepted Answer

The value of a put option increases when the underlying stock price declines, as it gives the option holder the right to sell the stock at a higher price than the current market price. Additionally, a decline in Treasury bill rates can decrease the risk-free rate, potentially increasing the value of options as the present value of the exercise price decreases.

Last Week, Alfonso Purchased a Three-Month Put Option on Shares