Question

    Which of the following statements is correct?

    >              I.        The price of a call option decreases as the strike price increases             II.        The price of a Put option increases as the strike price increases            III.        Both call and put options become more valuable as their time to maturity increases           IV.        American options can be exercised only at the time of maturity
    A Only i and ii Correct Answer Incorrect Answer
    B Only ii and iii Correct Answer Incorrect Answer
    C Only i, ii and iii Correct Answer Incorrect Answer
    D Only ii, iii, iv Correct Answer Incorrect Answer
    E All are correct Correct Answer Incorrect Answer

    Solution

    The call option is exercised when the exercise price is less than the current market price. The more the difference; the more probability of the call option being exercised. Therefore, the price of the call option will decrease when the strike price is more but the call option where the exercise price is comparatively lesser would be more valuable. Similarly, for the put option, its value is increased when the exercise price is more. The more remaining time to maturity, the more the value of both call and put options. The reason is that it gives time for the option to be exercised which gives it value. An American option can be exercised anytime before the maturity period

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