8006 Exam Dumps | If interest rates and spot prices stay the same, an increase in the value of a call option will be accompanied

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Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition
PRMIA.8006.v2021-04-25.q101
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Question 75/101

If interest rates and spot prices stay the same, an increase in the value of a call option will be accompanied by:

A. a decrease in the value of the corresponding put option

B. an indeterminate change in the value of the corresponding put option

C. an increase in the value of the corresponding put option

D. no impact in the value of the corresponding put option

Correct Answer: C

Explanation
The put-call parity makes sure that all else remaining equal, an increase in the value of a call option will be accompanies by an increase in the value of the corresponding put option.
Simply stated, the put-call parity can be expressed as:
Value of call - Value of put = Spot price - Exercise price discounted to the present The two terms on the right hand side of this equation are fixed. Therefore, for the equality to be maintained, any increase in the value of the call option on the left hand side has to be accompanied by the value of the put.
Choice 'c' is therefore the correct answer.

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