For European options, what of the effect of an increase in S_t? A)Decrease the value of calls and puts ceteris paribus B)Increase the value of calls and puts ceteris paribus C)Decrease the value of calls, increase the value of puts ceteris paribus D)Increase the value of calls, decrease the value of puts ceteris paribus

Question

Quizplus · Accepted Answer

An increase in S_t, which represents the cost of carry, will increase the value of the underlying asset and therefore increase the value of call options, as they give the holder the right to buy the underlying asset. On the other hand, an increase in the cost of carry will decrease the value of put options, as they give the holder the right to sell the underlying asset, which is now more expensive. Therefore, an increase in S_t will result in an increase in the value of calls and a decrease in the value of puts, hence the correct answer is D.

For European Options, What of the Effect of an Increase