The Federal Reserve Board decreases open-market purchases, which results in a general increase in interest rates. As a result, the price of Specific Car stock drops. Which of the following correctly describes the impact of these changes on the price of the call option for Specific Car stock?
A) Both changes cause the price of the call option to decrease.
B) Both changes cause the price of the call option to increase.
C) The higher interest rate will cause the price of the call option to decrease. The lower price of the stock will cause the price of the call option to increase.
D) The higher interest rate will cause the price of the call option to increase. The lower price of the stock will cause the price of the call option to decrease.
E) The higher interest rate has no direct effect on the price of the call option. The lower price of the stock will cause the price of the call option to decrease.

Question

Quizplus · Accepted Answer

Higher interest rates generally increase call option prices because they reduce the present value of the exercise price. However, a decrease in the stock price typically leads to a decrease in the call option price.

The Federal Reserve Board Decreases Open-Market Purchases, Which Results in a General