Why does value of embedded put option rise when interest rates rise?

CFA Level II
#1

Why does value of embedded put option rise when interest rates rise?

thanks!

#2

Because when interest rates rise, prices fall… The put is getting closer to the money, which means it has more value.

#3

Thank you but this is for put options embedded in bonds. INterest rates rise, prices fall, less chance to put the bond at a higher price so I thought the value of the embedded put option would fall…

#4

You thought wrong :slight_smile:

#5

what about the link with put call parity: asset + put = call + risk free bond.==> put = c + risk free bond - asset

When interest rate increase, risk free bond decrease, call decrease, and so the put decrease also no ?

#6

The call should increase if interest rates (i.e., risk-free rate) increase