18 lines
1.1 KiB
Plaintext
18 lines
1.1 KiB
Plaintext
The Effect of Time on Rho
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The more time until expiration, the greater the effect interest rate changes
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will have on options. In the previous example, a 25-basis-point change in
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the interest rate on the 80-strike based on a three-month period caused a
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change of 0.05 to the interest component of put-call parity. That is, 80 ×
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0.0025 × (90/360) = 0.05. If a longer period were used in the example—say,
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one year—the effect would be more profound; it will be $0.20: 80 × 0.0025
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× (360/360) = 0.20. This concept is evident when the rhos of options with
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different times to expiration are studied.
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Exhibit 2.16 shows the rhos of ATM Procter & Gamble Co. (PG) calls
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with various expiration months. The 750-day Long-Term Equity
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AnticiPation Securities (LEAPS) have a rho of 0.858. As the number of
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days until expiration decreases, rho decreases. The 22-day calls have a rho
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of only 0.015. Rho is usually a fairly insignificant factor in the value of
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short-term options, but it can come into play much more with long-term
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option strategies involving LEAPS.
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EXHIBIT 2.16 The effect of time on rho (Procter & Gamble @ $64.34)
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