Level 1 does not say anything about Value of Embedded Call Option changing with Interest Rates. And i think, establishing a relationship between them is not relevant either. It only talks about Value of Embedded Call Option changing with Interest Rate Volatility.
rus1bus Wrote: ------------------------------------------------------- > Level 1 does not say anything about Value of > Embedded Call Option changing with Interest Rates. > And i think, establishing a relationship between > them is not relevant either. > > It only talks about Value of Embedded Call Option > changing with Interest Rate Volatility. it is part of LEVEL 1 see Level 1 CFAI book 5 page 24 " …when int rates decline … the price of call option …increases because the call option becomes more valuable to the issuer. similarly, when int rates rise,… the price of embedded call option declines."
ataf, what you are quoting is value of free call option with interest rate changes. There is no argument on that, it will go down as interest rates go up. What we are discussing is value of Embedded call option with interest rate changes. Can you quote a relationship between value of Embedded call option with changes in Interest Rates in L1 text?
I am at work now, dont have the book with me, but that was the embedded call. I dont know what the difference is. What is the difference between stand-alone and embedded option? From your remark I think there might be a misunderstanding regarding the value. The value of the option is absolute value, we do not look at the value from buyer or seller perspective. thats why there is “-” sign in the formula: VCallableBond=VNonCallAbleBond - VCall pf
I figured it out! Peter Frampton, CFA @ Analyst Forum oh yeah, I feel like you do!
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)