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.
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