Which of the following statements about the interest rates and option prices is correct?
A.
If rho is positive, rising interest rates increase option prices.
B.
If rho is positive, rising interest rates decrease option prices.
C.
As interest rates rise, all options will rise in value.
D.
As interest rates fall, all options will rise in value.
The Answer Is:
A
This question includes an explanation.
Explanation:
Rho is a measure of the sensitivity of an option's price to changes in interest rates. If rho is positive, it means that the price of the option will increase when interest rates rise. This is because higher interest rates generally increase the cost of carry, which can make holding the underlying asset more expensive and thus increase the value of the option.
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