These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link.
Hello youtube we are back with a new video on the options greeks if you like this kind of content make sure that you subscribe to the channel and hit the bell button if you want to be notified every time i put a new video up so this video is the fifth video in a series on the greeks for options investors in this video we’ll be learning about row row measures the
Sensitivity of options prices to changes in interest rates it’s the first derivative of the option value with respect to the risk-free interest rate interest rates are a key input into options pricing formula and hopefully if you’ve followed the series i just did on pricing options you’ll have seen and pretty much every formula that i use i have an interest rate in
There somewhere and that’s that’s finance in general everything every cash flow gets present valued right and so if you change that interest rate in the formula you’re gonna get a slightly different value for the option so row is usually expressed as how much option prices change if the risk-free interest rate rises or falls by one percent per annum an increase in
The risk-free rate increases the value of call options and decreases the value of put options row is positive for long calls and negative for long put options row changes as time goes by moving towards zero as expiration approaches and that should make sense just because that present valuing effect in our options is going to become less and less as we get closer to
Time row tends to be low for a call option that’s deep out of the money and high for deep in the money call options it tends to be high for put options that are deep out of the money and low for deep in the money put option except under extreme circumstances the value of an option is less sensitive to changes in the risk-free interest rate than two changes in most
Of the other parameters that we’re looking at and so for this reason rho is the least used of the first-order greeks i often joke when i teach this in the class i have students from all over the world and i’m pretty sure that i’ll always have a greek student in the class and i often joke with them that row is the most boring of the greeks and you know this year one
Of the students put their hand up and said no no i have a friend and he is more boring than row so so it’s the second most boring of the greeks i think we can say now so often people get a little bit confused with well they often find many of the greeks confusing but people get confused a little bit with row because they often think well if if the risk-free rate
Is reduced we’ll save the federal reserve cuts rates that might drive up the price of asset values and you know which could be the underlying of the option so it might have a big effect on the value of of options now that’s actually not what we’re talking about we’re not talking about the effect of the rate change on the market which then affects the value of the
Option we’re simply saying if all other things are held equal so if the rate change occurred and the asset is unaffected the asset price goes sideways nothing happens we’re just saying how much does changing the input that we use in our pricing formulas for a risk-free rate how much does changing that by 1% affect the price of the option the answer usually is not
That much most option traders you know they really monitor their greeks a lot but we’re always sort of it’ll be maybe off the edge of their spreadsheet a little bit it’s not it’s not that the thing their eye is glued to all day long anyhow so that is that’s row don’t forget to hit the like button and subscribe to the channel and do comment below just let me know
You know if you’d like me to cover more things in these videos all of the videos are based on my book which is called trading and pricing financial derivatives and there’s a link to that in the description but there’s tons of other videos on derivatives so make sure that you check those out to see you later bye
Transcribed from video
What is Rho in Options? The Options Greeks – Options Trading Tutorial By Patrick Boyle