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Rho

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Rho

  • This topic has 3 replies, 2 voices, and was last updated 3 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • October 28, 2021 at 3:06 pm #639316
    akshayv73
    Participant
    • Topics: 7
    • Replies: 15
    • ☆

    Dear sir if interest rate increases why does premium for call option goes up and rho becomes positive for call option, since put option would be preferred when interest rate increases so premium for put option should rise and it should be positive

    October 28, 2021 at 3:54 pm #639330
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    The value of a call option is basically the current share price (Pa) less the present value of the exercise price (Pe). (As I explain in my free lectures on this, the multiplying of Pe by the term with ‘e’ in it is to discount the exercise price on a continuous basis).

    If the interest rate increases then the PV of the exercise price will fall (as PV’s always will with higher interest rates) and so the value of the call option will increase.

    (Having said this, because Rho on its own is only looking at the effect of changes in interest rates assuming everything else is unchanged, in practice it tends to have little affect and is the least used of the Greeks.)

    October 28, 2021 at 5:33 pm #639340
    akshayv73
    Participant
    • Topics: 7
    • Replies: 15
    • ☆

    Got it thanks sir

    October 29, 2021 at 7:32 am #639358
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Rho’ is closed to new replies.

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