A longer time to maturity will unambiguously increase the value of a call option because:
I. The longer maturity time reduces the effect of a dividend on call price.
II. With a longer time to maturity the present value of the exercise price falls.
III. With a longer time to maturity the range of possible stock prices at expiration increases.
A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question

Quizplus · Accepted Answer

II and III are correct because a longer time to maturity indeed decreases the present value of the exercise price due to the time value of money, and it increases the range of possible stock prices at expiration, which can potentially increase the value of a call option. Option I is not correct because the effect of dividends on call prices is more complex and not unambiguously reduced by a longer time to maturity.

A Longer Time to Maturity Will Unambiguously Increase the Value