The effects on the price of a call option from an increase in volatility and an increase in interest rates are: Increase in Volatility Increase in Interest Rates A. Decrease Increase B. Increase Increase C. Increase Decrease D. Increase No impact So volatility is def increase. But with an increase in IR surely the price of a call option decreases? Inverse yield curve and call option valuable at low yields? The answer says: When volatility increases, the price of options increase. When interest rates increase, call option prices increase. Am I going crazy here?

The price of the call option itself increases. It’s because the option to call the bond is worth more when interest rates are volatile

> > So volatility is def increase. But with an > increase in IR surely the price of a call option > decreases? Inverse yield curve and call option > valuable at low yields? The answer says: > When volatility increases, the price of options > increase. When interest rates increase, call > option prices increase. > > Am I going crazy here? B, rates up = higher calls, it is the opposite effect of what higher rates do to common stox, that is how i remember it. as far as vol, higher vol ALWAYS increases option value. I f i buy a microsoft call and volatility is 25%, but then a takeover rumor surfaces, implied vol pops, and my call premia inflates. BOOM rates up ----> lower puts though, that is key to know, too

use put call parity equation, C=P+S-X/(1+r)^t ==> interest rate increase --> C will also increase

thunderanalyst Wrote: ------------------------------------------------------- > use put call parity equation, > > C=P+S-X/(1+r)^t ==> interest rate increase --> C > will also increase good point, kemosabe. put call parity is a good price discovery mechanism - boom

Sorry i’m not following you. Ignoring volatility, Call option is valuable at low yields as it is an option to the borrower to retire debt at low yield levels. At high yields it’s worthless. What am I missing here?

mambovipi Wrote: ------------------------------------------------------- > The effects on the price of a call option from an > increase in volatility and an increase in interest > rates are: > Increase in Volatility Increase in Interest Rates > A. Decrease Increase > B. Increase Increase > C. Increase Decrease > D. Increase No impact > > So volatility is def increase. But with an > increase in IR surely the price of a call option > decreases? Inverse yield curve and call option > valuable at low yields? The answer says: > When volatility increases, the price of options > increase. When interest rates increase, call > option prices increase. > > Am I going crazy here? Volume 6, page 115, section 5.8, The Effect of Interest Rates and Volatility: “When interest rates are higher, call option prices are higher and put option prices are lower.” Page 116, “Higher volatility increases call and put option prices…” The question is NOT referring to a call feature on a bond. Be careful here.

AAAAAAAAAHHHHHHHHHHH It’s not referring to a bond… Thanks

I knew this wad what you were asking! So, if interest rates rise, call option price for options increases, but for bonds: P_cb = P_ncb - call option price if interest rates rise, the call option price decreases (unlikely the bond will be called), so P_cb increases.