call premium is higher at lower interest rate and vice versa. can you please tell me the reason

Question

anonymous · Answer

Hi Plasmid - Can you explain what you mean by call premium?

anonymous · Answer

I think in general: lower interest rates > lower discount rate > higher Present Value. Depends on what kind of option you mean. An option on bonds e.g. might have a higher call premium since the PV of the bonds increased. Did that help?

vaboro · Answer

The buyer of the call option has the right to buy an agreed quantity of a particular commodity or financial instrument from the seller of the option at a certain time for a certain price. When interest rates are low there is high probability that they will increase in the future. Thus, the probability that the buyer of the call option at the period of low interest rates will excersise the option when interest rates go up is relatively high. Hence, the higher call premium when interest rates are low.