Sir please explain why statement 1 is correct
As per my knowledge option prices have +ve relationship with volatility of underlying price but here interest rate is mentioned which has +ve relation with call & -ve relation with put
KartikeyAdvanced
Deivative pricing
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The question is talking about Interest Rate Volatility and not Interest Rate. Both Call and Put have a +ve relationship with the volatility of the underlying. That is why Statement 1 is correct.
Interest rate volatility isn’t the same thing as interest rate.
Interest rate volatility means interest rate bhot jyada upar niche ho rha h and since price of bond is cf÷(1+r) toh r jitna jyada badega utna hi jyada price will fall and vice-versa i.e. r bhot jyada girega toh price will rise bhot jyada and hence prices mein jitna jyada volatility hogi utna hi jyada option premium hoga
That means the undrelying for the derivative is bond or interest rate ?
You can watch the second review class of derivatives, sir has discussed this question and explained it nicely. Its towards the end of the class.
Underlying is the price of security only … mein toh linkage bta rhi hu ki interest rat volatile hone ki wjh se bond ki price volatile hojati as well share ki bhi volatile hojati hai kuki share price ki valuation mein bhi Re use hota hai toh ultimately price of the underlying jyada amt se change hone prr option premium bhi jyada hota h
PS:- TVM ke first page pe sir ne likhwaya tha that interest rate can be interpreted in 3 ways
1. As required rate of return (used in share price valuation)
2. Discounting rate( used in bond price valuation)
3. Opportunity cost of capital