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Good morning,
May i ask the impact of Rho on the price of option?
Why there is increase in call option price when interest rate increase and opposite for put option?
Thank youAs the risk-free interest rate changes, then so will the option price. Rho measures the rate as which the option price will change with changes in the risk-free interest rate (Although obviously you cannot be expected to calculate Rho in the exam).
The Black Scholes formula for the price of a call option is effectively the current share price less the present value of the exercise price. (As I explain in my free lectures, multiplying the exercise price by e^(-rt) is discounting the exercise price at the risk free interest rate on a continuous basis). The higher the rate of interest is then the lower the present value of the exercise price will be, and therefore the higher the value of the call option.
Because of the put-call party relationship, as the value of a call option increases the value of a put option decreases.
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