The Effect of Interest Rates
Interest rates affect a call
option's price. Although the effect of interest rates is somewhat complex, an
easy way to think of it is to think of a call as a way to purchase stocky paying an amount of money less than the face
value of the stock. By paying the call
premium, you save the difference between the stock price and the exercise price, the price you are willing to pay for the stock. The
higher the interest rate, the more interest you can earn on the amount saved by
buying a call. Thus, when interest rates are
higher, calls are more attractive than buying stock.
No comments:
Post a Comment