Few Doubts

can someone explain the following concepts, 1.Relationship between option price and risk free rate 2. Take or pay agreement 3. linear extrapolation and linear interpolation. Thanks in advance.

  1. Higher the risk free rate, the higher the option price. 2. You either take the agreement or you pay the agreement. 3. Extrapolation, using the data to go beyond what has been plotted/historical. It is forward looking and beyond the scope of the data collected. Interpolation is using the historical data gather to make a relationship/regression. I just made all those up, good luck.
  1. For employee stock options, higher the rf - higher the option price (since it’s based on BSM). However, if we’re talking Calls/Puts Calls - Positive correlation to rf Puts - Negative correlation to rf (this is due to the discounting of the X factor in C+X = S+P)

For #1 the Int rate affects the price of a put or call differently depending on if the underlying is an equity or a bond An increase in the risk free rate would cause a Call Option on an Equity to Increase and a Call Option on a Bond to decrease in value a Put Option on a bond to increase and a Put Option on a Bond to increase in value The other two I do not know. Reggie- If you’re just making sh*t up don’t post, it doesn’t help anyone - it’s not funny to mess others up in the hopes that it may help you to pass. Not very ethical IMHO.

How am I messing him up if I told him I just made all those up? They were educated guesses and I was just informing him of that. Take or Pay agreements were learned and Level I and I’m sure can easily be found by type “take or pay agreements” into google. And #3 I learned in Grade 10 math at a public high school. Good luck FinNinja, I suggest you don’t take your anger issues with you on exam day.