GCC 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?

Question

Quizplus · Accepted Answer

The exercise price of an option is the price at which the holder can purchase the underlying stock. By increasing the exercise price, the option becomes less valuable because the holder would have to pay more to purchase the stock. The other options would increase the value of the options: a higher stock price means the holder can purchase the stock for a lower price and potentially make a profit, a longer life means there is more time for the stock price to increase, and a higher risk-free rate means the option is more valuable as it offers a hedge against risk. A more risky stock price also offers potential for higher returns, which would make the options more valuable.

GCC Corporation Is Planning to Issue Options to Its Key