- CFA Exams
- CFA Level I Exam
- Study Session 16. Derivatives
- Reading 49. Basics of Derivative Pricing and Valuation
- Subject 8. Factors that Affect the Value of an Option

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**CFA Practice Question**

The value of a European put option can be either directly or inversely related to the time to expiration. The inverse effect can prevail with a put ______.

II. the higher the risk-free rate

III. the deeper it is in-the-money

I. the longer the time to expiration

II. the higher the risk-free rate

III. the deeper it is in-the-money

A. I and II

B. I and III

C. I, II and III

**Explanation:**For European puts, the longer time gives additional time for a favorable move in the underlying to occur. However, when a put is exercised, the holder receives money. The lost interest on the money is a disadvantage of the additional time.

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**User Contributed Comments**
4

User |
Comment |
---|---|

jiba |
All three factors can make the lost interest bigger. |

lvjunzhang |
not sure about III |

samsavon |
why the deeper it is in-the-money is right? |

REllis |
Deeper in the money is right because its more likely that the value of the put will decrease if it cannot be exercised early. Take for example a put with a strike price of 20 and the underlying price falls to $1. this put is deep in the money however, the underlying is more likely to increase in value at this point than decrease and as such, this can have an inverse effect on the value of the put. |