Consider a Black-Scholes setting.When a call option is deep in-the-money,a decrease in interest rates results in,ceteris paribus,
A)A decrease in the delta of the option.
B)A decrease in the insurance value of the option.
C)An increase in the intrinsic value of the option.
D)A decrease in the time value of the option.

Question

Quizplus · Accepted Answer

When interest rates decrease, the value of the call option increases, which leads to an increase in the option's delta. However, the option is already deep in-the-money, which means that delta is close to 1. As interest rates decrease, the delta will decrease slightly, but it will remain close to 1. Therefore, choice A is the best answer. Choices B, C, and D are incorrect because they do not reflect the effect of interest rate changes on deep in-the-money call options.

Consider a Black-Scholes Setting