If the risk-free rate of interest increases, all else being equal, we would expect the value of a call option to increase.

Question

Quizplus · Accepted Answer

An increase in the risk-free rate of interest would increase the time value component of the option price, which in turn would increase the value of the call option. This happens because a rise in the risk-free rate increases the cost of carrying the underlying asset and reduces the present value of the exercise price, both of which benefit the holder of a call option.

If the Risk-Free Rate of Interest Increases, All Else Being