In the Black-Scholes option pricing model, an increase in security price (S) will cause
A) an increase in call value and an increase in put value.
B) an increase in call value and a decrease in put value.
C) a decrease in call value and an increase in put value.
D) a decrease in call value and a decrease in put value.
E) an increase in call value and an increase or decrease in put value.

Question

Quizplus · Accepted Answer

According to the Black-Scholes model, an increase in the underlying security price (S) will increase the value of the call option, as the holder has the right to buy the security at a lower price than its market value. On the other hand, an increase in S will decrease the value of a put option, as the holder has the right to sell the security at a higher price than its market value, which becomes less valuable. Therefore, an increase in S will cause an increase in call value and a decrease in put value.

In the Black-Scholes Option Pricing Model, an Increase in Security