Direction of a European put when rates rise
Question
Holding everything else fixed, suppose the risk-free interest rate goes up. What happens to the value of a European put? Reply if it rises, if it is unaffected, or if it falls.
Short answer
(the put loses value). The put's holder receives the strike at expiry, and a higher rate shrinks its present value . Equivalently, higher rates raise the forward price, which helps calls and hurts puts, so put rho is negative.
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Open the worked solutionLessons behind this question
- Market Model and Risk-Neutral Valuation
- Option Mechanics: Calls, Puts, Moneyness, Intrinsic Value, and Exchange vs. OTC Markets
- Option Trading Strategies: Spreads, Combinations, and Payoff Engineering
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