Ace the CMA 2026 Challenge – Unlock Your Accounting Superpowers!

Question: 1 / 430

What is the relationship between the exercise price of a put option and market price?

The put option becomes less valuable as market price rises

The relationship between the exercise price of a put option and the market price is fundamentally grounded in the nature of put options themselves. A put option gives the holder the right, but not the obligation, to sell an asset at a predetermined exercise price before the option expiration. As the market price of the underlying asset rises, the put option becomes less valuable because the likelihood of being able to sell the asset at a higher exercise price diminishes.

When the market price is above the exercise price, it means the option is "out of the money," and the investor would be less inclined to exercise the option since they could sell the asset at a higher market price in the open market. Therefore, the value of the put option decreases as the market price increases, reflecting its diminished utility to the holder. Understanding this dynamic is crucial for evaluating options trading strategies and managing risk effectively.

Get further explanation with Examzify DeepDiveBeta

The put option's value is unaffected by market prices

A higher market price increases the put option's value

The floor for market price is set by the exercise price

Next Question

Report this question

Download Certified Management Accountant Practice Exam PDF Study Guide
Subscribe

Get the latest from Examzify

You can unsubscribe at any time. Read our privacy policy