Why does the value of a call option increase as the interest rate increases?
A) The stock seller must pay the call owner more interest.
B) The present value of the exercise price is reduced.
C) As interest rates increase, stock prices increase.
D) Interest rate increases reduce the option value.

Question

Quizplus · Accepted Answer

As interest rates increase, the present value of future cash flows decreases. Since the exercise price of a call option is a future cash flow, its present value decreases with an increase in interest rates, making the option more valuable.

Why Does the Value of a Call Option Increase as the Interest