As the price of the underlying stock rises above the exercise price of a warrant, the investor's ability to earn larger potential return diminishes. Therefore, the warrant premium will
A) increase.
B) decrease.
C) remain unchanged.
D) double.

Question

Quizplus · Accepted Answer

As the price of the underlying stock rises above the exercise price of the warrant, the warrant becomes more valuable, leading to an increase in demand and a rise in price (warrant premium). However, since the investor's ability to earn larger potential return diminishes, the increase in warrant premium will be more than offset by the decrease in the investor's potential return, resulting in a decrease in the warrant premium.

As the Price of the Underlying Stock Rises Above the Exercise