Options FAQ: How do interest rates impact options?
Managing a PositionInterest rates play a crucial role in options pricing, primarily through the risk-free rate, a key factor in models like Black-Scholes. But how exactly do rising or falling interest rates affect call and put options?
In this video, we break down:
- The relationship between interest rates and the cost of carrying a position
- Why rising interest rates lead to higher call option prices and lower put option prices
- How traders use short-term government securities like Treasury bills to approximate the risk-free rate
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