Correct answer is Afficeffice" />
This question tests understanding of option value drivers. The payoff of this option is driven by the volatility of the spread between F1 and F2 which depends upon the correlation between F1 and F2. As correlation declines toward 0 the spread volatility increases therefore the option value increases. Thus B, C, and D are all wrong.
Reference: ffice:smarttags" />Hull, Options Futures and Other Derivatives, 4th Edition, section 18.5
Question Type: Market Risk |