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

Increasing the exercise price of the option will decrease its value, as it will be less likely to be in-the-money (i.e., the stock price exceeds the exercise price) at expiration. The other options (A, C, D) would each increase the value of the option. A higher stock price variance would create the potential for a larger payoff, a longer time until expiration would increase the chance that the stock price could rise above the exercise price, and a higher risk-free rate would increase the present value of the potential payoff.

GCC Corporation Is Planning to Issue Options to Its Key