Q.88
Please explain
In the back it is given statement 1 is the only correct statement but call and put prices, increases because of an increase in volatility of the underlying.But here it is given call and put prices increases because of an increase in interest rate volatility.
Sahil SuranaPro
Basics of derivative pricing and valuations
Share
Option prices increase due to an Increase in the volatility of the underlying- that’s correct but underlying could be anything. It can be Stocks, Bonds, Interest Rate etc. In this case the underlying is the interest rate. So if the volatility of Interest rate rises. Call and Put options will increase in value.
Please correct me if I am wrong. Thank you.
I think the we can interpret in this manner that obviously share prices are related to interest rate and if there is volatility in interest rates there is volatility in share prices and because of the volatility in the underlying share price the call and put prices increases.