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Rho
It is the measure of an option’s sensitivity to changes in the risk free interest rate. Rho is the change in option price given a one-percentage (1%) point change in the risk-free interest rate.
| Call option |
|
|
Change |
| Spot price |
1,070 |
1,070 |
0 |
| Exercise price |
1,080 |
1,080 |
0 |
| Interest |
10% |
11% |
1% |
| Volatility |
25% |
25% |
0 |
| Time(days to expiry) |
11 |
11 |
0 |
| Rho |
14.1092 |
Anticipated Change |
0.1411 |
| Option price |
15.5275 |
15.6664 |
0.1390 |
Here the value of Rho is 14.10. This has to be interpreted as if the risk free interest rates go up by 1% the price of the option will move by Rs 0.14109. In the example we see that when the interest rate increases by 1% the price increases by Rs 0.13895.
To put this in another way: if the risk-free interest rate changes by a small amount, then the option value should change by 14.10 times that amount. For example, if the risk-free interest rate increased by 0.01 (from 10% to 11%), the option value would change by 14.10*0.01 = 0.14.
For a put option the relationship is inverse. If the interest rate goes up the option value decreases and therefore, Rho for a put option is negative.
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