Corporation is planning to issue options to its key employees, and it is now discussing the terms to be set on those options.Which of the following actions would decrease the value of the options, other things held constant?
A)GCC's stock price suddenly increases.
B)The exercise price of the option is increased.
C)The life of the option is increased, i.e., the time until it expires is lengthened.
D)The Federal Reserve takes actions that increase the risk-free rate.
E)GCC's stock price becomes more risky (higher variance).

Question

Quizplus · Accepted Answer

Increasing the exercise price of the option would decrease the value of the option, as it would require the employee to pay more to purchase the stock at a later date. This would make the option less attractive to the employee. The other options would all increase the value of the option (A, D, E) or have no effect (C).

Corporation Is Planning to Issue Options to Its Key Employees