Rho
The sensitivity of an option’s theoretical value to a change in interest rates is given by Rho. All futures
options have a negative Rho. Increasing interest rates decrease the value of
an option because it costs more to carry the option position. Rho is generally
not used to choose an option strategy or manage risk on most futures; however,
Rho often plays a role in identifying option strategies and in managing risk for
stocks, currencies, and physical commodities because such instruments can be
sensitive to interest rate changes.
Formula for Futures:
Where:
C = price of call.
P = price of put.
Formula for Non-Futures:
Formula for Foreign Currencies:
