Sign of call rho for a European call
Question
All else equal, how does an increase in interest rates affect a European call's value? Enter for up, for unchanged, for down.
Short answer
(it rises). The strike paid at expiry is worth less in present-value terms when rates rise, and equivalently the forward price rises, so call rho is positive.
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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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