There Are Call Options on the Common Stock of XYZ

question 13

Multiple Choice

There are call options on the common stock of XYZ Corporation. Which of the following best describes the factors that affect call option values?

• A) The price of call options will rise if XYZ's stock price rises.
• B) The higher the strike price, the higher the call option price.
• C) Assuming the same strike price, a call option that expires in 1 month will sell for a higher price than one that expires in 3 months.
• D) The less volatile a stock is, the more valuable a call option on the stock is.
• E) If the risk-free rate of interest increases, the value of call options will decrease.

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Definitions:

Inflation

A general increase in prices and fall in the purchasing value of money.

Present Value

The valuation of an expected income stream determined by discounting the future income to the present using a discount rate.

Income Stream

A regular flow of money from an investment, property, or other financial assets.

Real Interest Rate

The interest rate adjusted for inflation, reflecting the real cost of borrowing or the real yield on savings.