How Does a Change in the Risk-Free Interest Rate Affect the Premium of a Call Option?

An increase in the risk-free interest rate generally increases the premium of a call option and decreases the premium of a put option. For a call option, a higher interest rate makes it more expensive to finance the purchase of the underlying asset that the call option represents.

Conversely, a higher interest rate increases the present value of the strike price that will be paid in the future. Both factors contribute to a higher call option premium.