tobeornottobe

In the question, it is the embedded call that is referenced. The embedded call has an inverse relationship with rates.


Wall now turns his attention to the value of the embedded call option. How does the value of the embedded call option react to an increase in interest rates? The value of the embedded call:

A) decreases.

B) increases.

C) remains the same.


Your answer: A was correct!

Since the underlying asset to the option (the bond) decreases in value the option must decrease in value also. (Study Session 14, LOS 54.e, f)



Edited 1 time(s). Last edit at Tuesday, May 4, 2010 at 12:00PM by tenten.