Which of the following statements is true about the relationship between the option price and the risk-free rate?
A)a call price is nearly linear with respect to the risk-free rate
B)a call price is highly sensitive to the risk-free rate
C)the risk-free rate affects a call but not a put
D)the risk-free rate does not affect a call price
E)none of the above

Question

Quizplus · Accepted Answer

The price of a call option increases as the risk-free rate increases, which can be understood through the Black-Scholes model. This relationship is due to the cost of carry, as higher risk-free rates make it more expensive to hold the underlying asset, thus increasing the call option's value. However, the relationship is not highly sensitive or linear, and both call and put prices are affected by the risk-free rate, contrary to some options.

Which of the Following Statements Is True About the Relationship