CFA Practice Question

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CFA Practice Question

A stock is selling for $69.88. The risk-free rate is 5%.

Consider the following options on this stock:
Put option A: Exercise price X = $70, Days to option expiration = 15.
Put option B: Exercise price X = $70, Days to option expiration = 120.
Call option C: Exercise price X = $70, Days to option expiration = 15.
Call option D: Exercise price X = $70, Days to option expiration = 120.

Which statement(s) is (are) true?

I. RHOA > RHOB
II. RHOA < RHOB
III. RHOC > RHOD
IV. RHOC < RHOD
Correct Answer: I and IV

For a call option, rho (RHOc) is always positive. For a put option, rho (RHOp ) is always negative. RHOc and RHOp change as time passes, with both tending toward zero as expiration approaches.

User Contributed Comments 3

User Comment
ragingrazz If RHOp is always negative and tends toward zero approaching T=0, the Rho of a put with fewer days to expiry would be greater than the put with more days left. Thus, RHOA> RHOB.
yly14 somehow i believe that RHOp and RHOc are absolute values, explaining to the first comment, am i right?
bmeisner Well a put's value decreases when interest rates go up because the probability of that put being in the money goes down (the expected stock return is higher with higher interest rates). Thats why rho of put is negative and also why rho of call is positive. With more time to maturity, just like a bond, there is more absolute sensitivity to interest rates, all else being equal.
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