The change in option price given a one percentage point change in the risk-free interest rate. Rho measures the change in an option's price per unit increase –typically 1% – in the cost of funding the underlying.
Change in an option premiumRho = ---------------------------------------------------
Change in cost of funding underlying
Example:
Assume the value of Rho is 14.10. If the risk free interest rates go up by 1% the price of the option will move by Rs 0.14109. To put this in another way: if the risk-free interest rate changes by a small amount, then the option value should change by 14.10 times that amount. For example, if the risk-free interest rate increased by 0.01 (from 10% to 11%), the option value would change by 14.10*0.01 = 0.14. For a put option the relationship is inverse. If the interest rate goes up the option value decreases and therefore, Rho for a put option is negative. In general Rho tends to be small except for long-dated options.
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