Calls vs Put : Effect of interest rates

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no_tension

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Hi
Can anyone please help out with the effect of interes rates on the price of calls and Puts?
 
Ok here's the way I remember it:

Use put-call parity (you have to remember this for the exam)

Call + Bond = Put + Stock

Thus,

Call = Put + Stock - Bond

So if interest rates increase, then bond price goes down, so call price goes up.

Similarly,

Put = Call + Bond - Stock

So if interest rates increase, then bond price goes down, so put price goes down.

So sometime in your studying you will decide that argument doesn't work because interest rates affect the other option in that equation and they affect stock prices. Then I can make that as rigorous as you want but the argument will still be about the same. The gist of that making it rigorous is that the direct impact of interest rate moves on the bond is much more important than the indirect impact on the other option and the statistical effect on stock prices.
 
Thanks Joey
This is excellent explaination. I think I'll not forget this now.
 
The other way you can do it is the following (just in case they throw in European/American puts and calls)

C = Max [ 0, S - X / 1+ RFR] -> here the discount rate is used to reduce X, therefore it will increase the value of the call

P= Max [0, X / 1+RFR - S] -> As for puts you can see that the discount reduces the overall value of the put

For options the overall relationship goes as follows,
the value of a call option will increase as, Volatility up, RFR up, Time to Maturity up, X down
the value of a put option increase as, Volatility up, RFR down, Time to Maturity up, X up

Hopefully this clears it up for you....
 
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