According to the Black/Scholes option valuation model, a call option's value decreases if
A)interest rates increase as the option approaches expiration
B)the variability of the stock's return decline and the interest rate decreases
C)an increase in the price of the stock results in a two for one stock split
D)the option is exercised

Question

Quizplus · Accepted Answer

The Black/Scholes model indicates that a call option's value decreases if the variability (volatility) of the stock's return declines or if the interest rate decreases. This is because lower volatility reduces the potential for high returns, making the option less valuable, and lower interest rates decrease the cost of carrying a position in the option.

According to the Black/Scholes Option Valuation Model, a Call Option's