A stock is trading at $20. A one-month call with a strike of 19 is valued at $1.439 and has a rho of 1.09. An increase in interest rates of 10 basis points changes the call value to, approximately,
A) 1.440
B) 1.450
C) 1.548
D) 2.529

Question

Quizplus · Accepted Answer

Rho measures the sensitivity of an option's price to a change in interest rates. Here, a rho of 1.09 means the option's price will increase by $0.0109 (1.09 cents) for a 1% (100 basis points) increase in interest rates. For a 10 basis point increase, the price increase would be 1/10th of that, or approximately $0.00109. Adding this to the original price of $1.439 gives approximately $1.440.

A Stock Is Trading at $20