Why Do Higher Interest Rates Increase the Value of Call Options?
Higher interest rates increase a call option's value due to the effect on the forward price of the underlying asset and the cost of carry. Owning a call option is a leveraged way to get exposure to an asset without having to buy the asset itself.
The money not spent on the asset can be invested at the risk-free rate. A higher rate means more interest earned on this capital, which makes owning the call a more attractive alternative to owning the asset outright.
This added benefit is reflected in a higher call premium.
Glossar
Higher Interest Rates
Impact ⎊ Higher interest rates directly impact the theoretical valuation of options through the Rho Greek, which measures the option price sensitivity to the risk-free rate.
Impact of Interest Rates
Impact ⎊ The Impact of Interest Rates on financial derivatives, particularly options, is quantified by the Rho Greek, which measures the sensitivity of the option's price to changes in the risk-free rate.
Interest Rates
Rate ⎊ The prevailing cost of borrowing funds, expressed as an annualized percentage, fundamentally influences asset valuation across cryptocurrency derivatives, options trading, and traditional financial markets.