A rise in the foreign interest rate will
A)raise the value of foreign-currency call options and lower the value of foreign-currency put options
B)raise the value of foreign-currency put options and lower the value of foreign-currency call options
C)raise the value of both foreign-currency put and call options
D)reduce the value of both foreign-currency put and call options

Question

Quizplus · Accepted Answer

When there is a rise in the foreign interest rate, it will make the foreign currency relatively more attractive, resulting in an increase in demand for the currency. This increase in demand will cause the value of the foreign currency to rise. As a result, the value of foreign-currency put options will decrease as they give the holder the right to sell the currency at a specified price, which is now higher than the market price. On the other hand, the value of foreign-currency call options will increase as they give the holder the right to buy the currency at a specified price, which is now lower than the market price. Therefore, option B is correct.

A Rise in the Foreign Interest Rate Will