Which of the following is correct?
A) The longer the time to maturity, the less the value of a currency call option, other things equal.
B) The longer the time to maturity, the less the value of a currency put option, other things equal.
C) The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things equal.
D) The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things equal.

Question

Quizplus · Accepted Answer

The correct answer is D. The value of a currency call option increases as the exercise price gets lower relative to the spot rate because it becomes more likely that the option holder will be able to buy the currency at a lower price than the current spot rate. The longer the time to maturity, the greater the chance that the spot rate could move against the option holder, so the value of a call option decreases over time. Option B is incorrect because the value of a put option increases as the time to maturity increases. Option C is incorrect because the value of a put option increases as the exercise price gets higher relative to the spot rate.

Which of the Following Is Correct