stock options / risk free rate

CFA Level II
#1

Effect of Risk free rate on value of stock option ? Increase or decrease.

#2

Positively related…

#3

call option – increases put option – decreases Having said that, the sensitivity is very low…meaning its not very sensitivity to changes in Rho

#4

At the risk of asking the obvious, are all the “stock” call options ?

#5

why would a company grant their employees a put option on their own stock?

#6

ENRON

#7

nomad_SA Wrote: ------------------------------------------------------- > ENRON 2. Lehman Brothers

#8

Here’s the logic I use to remember Rho’s effect on options: If you have a call you participate in the upside of a stock without putting down your own cash. The ability to keep the cash in your pocket is worth more when interest rates are high and you can invest it in higher yielding investments. Thus, the option is more valuable and more expensive. For a put option you’re participating in the downside. However, instead of buying a put, you could have just decided to short the stock instead and gotten cash immediately. In a high yielding environment, you’d rather have the cash to invest in high yielding investments so the value of paying money to buy an option rather than getting money from a short sale is less appealing. Thus, the put value is less valuable and cheaper.

#9

I think the easiest way to remember is through call-put parity relation.