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What is the Impact of Interest Rates?

Impact of interest rates on options on cash instruments (shares, for example) with immediate payment of the premium:

As is the case with every forward transaction, financing costs (interest rates) and income (dividends, for example) from the underlying instrument, must be considered when calculating the option price.With options on cash instruments, for example shares, the buyer of a call initially only pays the option premium. This is much less than if he had bought and paid for the underlying instrument immediately. He can invest the "saved" capital over the short term or "save" the financing costs which would be incurred by an immediate purchase of the shares.As the seller of the call must at least theoretically hold the underlying instrument ready for delivery, he consequently does not have any capital available for investing. This advantage is taken into account by the premium on the option price.

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As a rule there are three different option types:

The influences exerted by the short-term financing rate on call and put prices only apply to options on shares or other underlying instruments that can be bought on the cash market (cash instruments), with immediate payment of the option premium. This does not apply to deep in-the-money European-style puts, as the option holder incurs interest costs owing to the missing exercise possibility. The price of such put contracts falls when interest rates increase.
The underlying instrument need not be financed for options on futures. Hence, the interest rate has no impact on calls and puts in this case. However, the option premium to be paid is definitely an additional cost factor compared to the purchase of the futures contract. To offset this factor, option prices fall when interest rates increase.
(Future-style options, for example all Eurex options on futures) Short-term interest rates have absolutely no influence on the price for such options. Compared to options on futures with traditional premium payment, these options do not get any cheaper when interest rates increase.

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