“lower volatility, shorter term, and a lower risk free rate will usually decrease the estimated fair value of the option” Can somebody explain why lower risk free rate will lead to lower value of the option.
I think of this in terms of the Put-call Parity equation. C=P+S-X/(1+rf)^t we are talking about a Put option here. rf reduces -> X/(1+rf)^t increases 100/1.10=90.9 100/1.05=95.24 so RHS reduces. So C reduces. similarly - t reduces -> X/(1+rf)^t increases, again C reduces.
CP - looking at it your way works. thks!
I wrongly wrote that we are talking about a Put Option. We are talking about the Call option… Sorry about the typo.