GCC Corporation is planning to issue options to its key employees,and it is now discussing the terms to be set on those options.Which circumstance would decrease the value of the options,other things held constant?
A)GCC's stock price becomes more risky (higher variance).
B)The exercise price of the option is increased.
C)The life of the option is increased, i.e., the time until it expires is lengthened.
D)The government takes actions that increase the risk-free rate.

Question

Quizplus · Accepted Answer

Increasing the exercise price of the option would decrease the value of the options, as it would reduce the potential profit for the employee. A higher stock price variance (A) would actually increase the value of the options, as it increases the potential for a larger payoff. Increasing the life of the option (C) would also increase the value of the option, as it increases the time available for the stock price to potentially increase. An increase in the risk-free rate (D) would also increase the value of the option, as it would increase the potential payoff relative to a risk-free investment.

GCC Corporation Is Planning to Issue Options to Its Key