Can someone explain how riskless interest rates effect options? For stock options, which of the following will least likely increase put option values and decrease call option values? A) An increase in the exercise price. B) An increase in the riskless rate of interest. C) An unexpected dividend payment on the stock. D) A decrease in the riskless rate of interest. Your answer: C was incorrect. The correct answer was B) An increase in the riskless rate of interest. An increase in the riskless rate of interest will decrease put option values and increase call option values.
C= (S ; K; T; V; r; D) (+ ; -; +/-; + ;+; -) P= (S; K; T; V; r; D) (-; +; +/-; +; -; +) Where: S= underlying asset K= Strike T= time to expiration V= volatility r= risk free rate D= dividend The +/- refers to positive and negative relationship with the price of the option
Whats the reason for the +/- for volatility for the call and put?
because it is not always true that an European call with longer maturity is worth more than a European call option with shorter maturity. It is a bit long to explain the difference. Really helpful is the book from John Hull “Options, futures and other derivatives”.
Using put-call parity relationship can be helpful in these situations.