Why does an increase in the strike price of an option decrease the value of a call option and increase the value of a put option?
What will be an ideal response?
We know that holding constant the maturity date of two options implies that the distribution of possible future exchange rates is the same for the two options. Hence, it should be apparent that increasing the exercise price of a call option must decrease its value because doing so removes possible states of the world over which the contract provides revenue when the strike price is lower. Conversely, increasing the exercise price of a put option must increase its value because doing so adds possible states of the world over which the contract provides revenue compared to when the strike price is lower.
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