How Do Changes in Interest Rates Affect the Calculation of Implied Volatility?

Changes in interest rates have a relatively small but direct impact on option prices and thus on the implied volatility calculation. In the Black-Scholes model, higher interest rates slightly increase the price of call options and decrease the price of put options.

This is because higher rates increase the forward price of the underlying asset and reduce the present value of the strike price. Since the option's market price is a known input, if rates change, the calculated implied volatility must adjust slightly to make the formula balance with the market price.