why would call option price increase when there is increase in interest rates?
because the forward price of the underlying increases
expected future price will be higher and cost of cash is higher. If I can buy a stock for $20 or invest $20 in cash, the price in one year should theoretically be at least the same, i.e. $20 * (1 + r). If rates go up, the value of this expected future price goes up, hence the call option value goes up then there’s also the leverage inherent in options, it’s much less of a cash outlay to own options vs. the stock, if rates are higher, i can take the capital saved from buying the option instead of the stock and invest that cash at the higher rate. Thus as a call buyer i’m willing to pay more for call options in a higher rate environment
I chose to just memorize that Rho for call is positive and put is negative, too full to take in the underlying reasons.
Alternatively to the explanations above, think of call put parity: c = s + p - x/(1+r) If r increases, x/(1+r) decreases and the value of c increases.
truth
freakingout Wrote: ------------------------------------------------------- > I chose to just memorize that Rho for call is > positive and put is negative, too full to take in > the underlying reasons. truth
Kabaka Wrote: ------------------------------------------------------- > Alternatively to the explanations above, think of > call put parity: > > c = s + p - x/(1+r) > > If r increases, x/(1+r) decreases and the value of > c increases. good one. thx
freakingout Wrote: ------------------------------------------------------- > I chose to just memorize that Rho for call is > positive and put is negative, too full to take in > the underlying reasons. I couldn’t agree anymore. I’ve noticed a bunch of questions pop on the boards lately that aren’t connected to the LOS. If we were in February, then fine, if it helps you understand the concept better I wouldn’t mind performing some research. But this is the last week, if you don’t understand something commit to memorization and move on.