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FRM Part I · FRM Exam Part I · Option Sensitivity Measures: The "Greeks"

For European options on a non-dividend-paying stock, all else equal, which statement about the signs of rho under the Black-Scholes-Merton model is correct?

Call rho is positive and put rho is negative. A higher risk-free rate reduces the present value of the strike price, which makes the right to buy more valuable and the right to sell less valuable.

  1. ACall rho is positive and put rho is negativeCorrect
  2. BCall rho is negative and put rho is positive
  3. CBoth call rho and put rho are positive
  4. DBoth call rho and put rho are negative

Explanation

A higher risk-free rate lowers the present value of the strike. That raises the value of a call, which has a positive rho, and lowers the value of a put, which has a negative rho. The other options reverse or equalize the signs, which contradicts the discounting effect of the strike.

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