Black Scholes

[rexthedog]

Why is the following statement from topic test answer correct?
Holding all other option factors constant, an increase in interest rates causes call prices to increase and put prices to decline.
Surely if interest rates rise the price falls making the call more out of the money. Therefore the call price decreaes?
Or is this referring to the overall bond? So call price decreases which in turn makes the overall bond price higher? I assumed that using the word call price meant they were just referring to the impact on the option.

 

[lunacy]

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91351854

 

[carcosa]

Is Black Scholes used for pricing options embedded in bonds? I don’t think that is the case. Pricing options on stocks or an index (which Black Scholes calculates) is different than a call our put option on a bond.

 

[S2000magician]

Interest rates affect options on bonds differently than they do options on stocks, because the value of the underlying (bond) changes in direct response to the change in interest rates.
Don’t use your understanding of stock options to try to understand bond options; it’ll fail you.