In the Black-Scholes option pricing model,an increase in exercise price (X)will cause
A) An increase in call value and an increase in put value
B) An increase in call value and a decrease in put value
C) A decrease in call value and an increase in put value
D) A decrease in call value and a decrease in put value
E) An increase in call value and an increase or decrease in put value

Question

Quizplus · Accepted Answer

In the Black-Scholes option pricing model, an increase in the exercise price (X) will result in a decrease in the value of call options, as it becomes less likely that the underlying asset will reach a level that is profitable for the option holder to exercise. On the other hand, an increase in the exercise price will lead to an increase in the value of put options, as it becomes more likely that the underlying asset will fall below the exercise price and become profitable to the option holder. Therefore, the correct answer is C – a decrease in call value and an increase in put value.

In the Black-Scholes Option Pricing Model,an Increase in Exercise Price