Question

In the black-scholes option pricing model, an increase in the risk-free rate (rfr) will cause?

Answer 1

In the black-scholes option pricing model, an increase in the risk-free rate (rfr) will cause an increase in call value and a decrease in put value.

The Black-Scholes Pricing Model for Options is a method for calculating the theoretical value of a call or put option based on six factors: volatility, option type, price of the underlying stock, time value, strike price, and current risk-free rate.

Given that call options have a positive Rho, they typically increase in price significantly as interest rates rise. Due to its negative Rho, put options tend to lose some of their value as interest rates rise, all other things being equal.

Therefore, In the black-scholes option pricing model, an increase in the risk-free rate (rfr) will cause an increase in call value and a decrease in put value.

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