Series 7 practice questionmediumOptions — Interest Rate Impact
All else being equal, rising interest rates tend to have what effect on option premiums?
- ACall premiums increase, put premiums decrease✓ Correct answer
- BCall premiums decrease, put premiums increase
- CBoth premiums increase
- DNo effect on either
Explanation
Why A — Call premiums increase, put premiums decrease
Rising interest rates increase call premiums and decrease put premiums. Higher rates increase the cost of carrying stock, making calls (which substitute for stock ownership) more valuable. Conversely, the present value of the put's strike price decreases with higher rates, reducing put values.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 755+ Series 7 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Related Investment Information & Recommendations questions
- An investor writes 1 uncovered MNO Nov 45 call at $4. What is the breakeven point?
- An increase in implied volatility of the underlying stock would have what effect on option premiums?
- An investor writes 1 uncovered PQR Dec 30 put at $2.50. What is the breakeven point?
- An investor buys 1 XYZ 50 call and writes 1 XYZ 50 put with the same expiration. This synthetic position is equivalent…