“When interest rates rise, the value of a put option declines.” How? Could someone provide a good explanation? Impact on call is clear: “When interest rates rise, the value of a *call* option rises.” This makes sense, because instead of buying the asset, you pay a small amount for the call, and invest the rest to gain from the rising interest rates.
my guess is because the lower the spread between the current price and the put price, the lower the premium charged for the put option going to be edit: that sounds wrong, let me check the textbook
looking at a price-yield curve for a putable bond, it actually looks as though when interest rates rise (after hitting the rate at which price=puttable price) the spread between the price of a putable bond and an equivalent option-free bond widens so it doesn’t make much sense because it looks like the cost of the option is unchanged before hitting put price, then increases the more rates rise to bring price further down from the put price
just keep it with stocks, no need for bonds, other than assume a certain risk-free rate, then see how to make sense of it.
Here’s something to know about factors affecting option prices: DIVUTS Dividends up: call down, put up Interest rate (rf)up: call up, put down Volatility up: call up, put up Underlying security price up: call up, put down Time to expiration up: call up, put up Strike price up: call down, put up
ohh this is not a FI question :-r
think about it simple way, Assume your put option is in the money and its worth 1 bucks. now, interest rates go up, price of the bonds go down, if prices go down, then the value of put ummm should go up!!! WHAT SORT OF QUESTION IS THIS?
Dreary Wrote: ------------------------------------------------------- > “When interest rates rise, the value of a put > option declines.” > > How? Could someone provide a good explanation? > I think it has to do with the opportunity cost of holding money elsewhere. Not sure
love you pepp…you crack me up. But I like how you think things through… Thanks for DIVUTS map1.