Assume that a $75 strike call has a 1.0% continuous dividend,90 days until expiration and stock price of $72.00.What is the rho of the option as the interest rate changes from 6.0% to 5.0%?

Question

Quizplus · Accepted Answer

The rho of the option is the change in the option price for a 1% change in the interest rate. In this case, the interest rate changes from 6.0% to 5.0%, so the change in the interest rate is -1.0%. The rho of the option is calculated as follows:Rho = -S * t * e^(-r * t) * N(d2)where:S is the stock pricet is the time until expirationr is the interest rated2 is the second cumulative normal distribution functionPlugging in the values given in the question, we get:Rho = -72 * 90/365 * e^(-0.05 * 90/365) * N(-0.52) = -0.07Therefore, the rho of the option is -0.07, which is choice A.

Assume That a $75 Strike Call Has a 1