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Rho (ρ)

The sensitivity of an option's price to a 1% change in the risk-free interest rate.

Rho for a call = K·T·e^(−rT)·N(d₂) / 100 > 0. Higher rates reduce the PV of the strike payment, increasing call value. Rho for a put is negative (higher rates reduce put value). Among the Greeks, rho has the least practical impact for short-dated options but becomes significant for LEAPS (long-dated options). CFA L2 focuses primarily on delta, gamma, theta, and vega.

Formula
ρcall=KTe−rTN(d2)100\rho_{call} = \frac{KTe^{-rT}N(d_2)}{100}

Related Terms

Interest Rate Swap (IRS)

An agreement to exchange fixed-rate cash flows for floating-rate cash flows on a notional principal.

Black-Scholes-Merton Model (BSM)

The foundational option pricing formula that gives the fair value of a European call or put as a function of spot, strike, rate, volatility, and time.