hi all, this may seem basic, but how does risk free rate raise increases call option and decreases put option price?
The easiest way to see this (i.e., to remember it) is to look at put-call parity:
S + p = c + X/(1 + r)
If r increases (while S and X are unchanged), then this equation remains balanced only if c increases or p decreases.
This is a good way to remember it, thanks!
However, isn’t it also true that when interest rates rise, put values increase and call values decrease? Which is the opposite of what happens with the risk free rate
You are referring to specific assets that are directly related to interest rates, i.e. bonds, option embedded bonds.