Last Week, Alfonso Purchased a Three-Month Put Option on Shares

question 234

Multiple Choice

Last week, Alfonso purchased a three-month put option on shares of DOG stock. This week DOG shares declined in price and the rate on Treasury bills also declined. As a result of these two events,
With all else constant, the value of Alfonso's options:

• A) Increased in value as a result of both events.
• B) Decreased in value as a result of both events.
• C) Increased in value due to the decline in the market value of DOG stock but was unaffected by the change in the Treasury bill rate.
• D) Decreased in value due to the decline in the market value of DOG stock but increased in value from the change in the Treasury bill rate.
• E) Changed in value but the direction of the change cannot be determined from the information provided.

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Definitions:

Compounded Quarterly

The process of calculating interest on both the initial principal and the accumulated interest from previous periods, done four times a year.

Maturity

The date on which the principal amount of a financial instrument is due to be paid back in full.

Non-interest-bearing

Referring to financial instruments or accounts that do not earn interest over time.

Compounded Quarterly

Calculating interest by adding previously earned interest to the principal amount at the end of every quarter, leading to an increase in the interest amount over periods.