How RFR affects call values and put values

[raffythebuggy]

Hey
Can someone explain how an increase in RFR can increase call values and decrease put values?
Thanks alot!

 

[S2000magician]

The easiest way to see it is to look at put-call parity:
S0 + P0 = C0 + PV(X)
If the risk-free rate increases, then PV(X) decreases; thus, either C0 must increase or P0 must decrease (or both). If the risk-free rate decreases, PV(X) increases; thus, either C0 must decrease or P0 must increase (or both).
In summary:

• When RFR increases, call prices increase and put prices decrease
• When RFR decreases, call prices decrease and put prices increase

I would never bother to memorize the summary; on the exam I’d write out the put-call parity formula and work it out from there.