CoboCards App FAQ & Wishes Feedback
Language: English Language
Sign up for free  Login

This flashcard is just one of a free flashcard set. See all flashcards!

All main topics / Finance & Investment / Derivatives / Derivatives
5.When interest rates increase with all else remaining the same, which of the following is true? 
A.Both calls and puts increase in value
B.Both calls and puts decrease in value
C.Calls increase in value while puts decrease in value
D.Puts increase in value while calls decrease in value
Answer: C

Calls increase and puts decrease in value. As explained in the text an increase in interest rates causes the growth rate of the stock price to increase and the discount rate to increase. An increase in interest rates therefore reduces the value of puts because puts are hurt by both a discount rate increase and a growth rate increase. For calls it turns out that the growth rate increase is more important than the discount rate increase so that their values increase when interest rates increase. (Note that we are assuming all else equal and so the asset price does not change.)

New comment
Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015




Forgot password?
Deutsch  English