What is 'Rho'
Rho is the rate at which the price of a derivative changes relative to a change in the riskfree rate of interest. Rho measures the sensitivity of an option or options portfolio to a change in interest rate.
For example, if an option or options portfolio has a rho of 1, then for every percentagepoint increase in interest rates, the value of the option increases 1%.
BREAKING DOWN 'Rho'
In mathematical finance, quantities that measure the price sensitivity of a derivative to a change in an underlying parameter are known as "the Greeks." The Greeks are important tools in risk management as they allow a manager, trader or investor to measure the change in value of an investment or portfolio to a small change in a parameter. More importantly, this measurement allows the risk to isolated, thus allowing a manager, trader or investor to rebalance the portfolio to achieve a desired level of risk relative to that parameter. The most common Greeks are delta, gamma, vega, theta and rho.
Rho Calculation and Rho In Practice
The exact formula for rho is complicated, but it is calculated as the first derivative of the option's value with respect to the riskfree rate. Rho measures the expected change in an option's price for a 1% change in U.S. Treasury bill's riskfree rate. For example, assume that a call option is priced at $4 and has a rho of 0.25. If the riskfree rate rises 1%, say from 3% to 4%, the value of the call option would rise from $4 to $4.25.
Call options generally rise in price as interest rates increase and put options generally decrease in price as interest rates increase. Thus, call options have positive rho, while put options have negative rho. As another example, assume that put option is priced at $9 and has a rho of 0.35. If interest rates were to decrease from 5% to 4%, then the price of this put option would increase from $9 to $9.35. In this same scenario, assuming the call option mentioned above, its price would decrease from $4 to $3.75.
Rho is larger for options that are inthemoney and decreases steadily as the option changes to become outofthemoney. Also, rho increases as time to expiration increases. Longterm equity anticipation securities (LEAPs), which are options that generally have expiration dates at least two years away, are far more sensitive to changes in the riskfree rate and thus have large rho than shorterterm options.
Though rho is a primary input in the Blackâ€“Scholes optionspricing model, a change in interest rates generally has a minor overall impact on the pricing of options. Because of this, rho is usually considered to be the least important of all the option Greeks.

Gamma Neutral
A method of managing risk in options trading by establishing ... 
Greeks
Dimensions of risk involved in taking a position in an option ... 
Lambda
The ratio of the percentage change in an option contract's price ... 
Vega Neutral
A method of managing risk in options trading by establishing ... 
Call On A Put
One of the four types of compound options, this is a call option ... 
Exotic Option
An option that differs from common American or European options ...

Markets
How & Why Interest Rates Affect Options
The Fed is expected to change interest rates soon. We explain how a change in interest rates impacts option valuations. 
Trading
The Anatomy of Options
Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio. 
Trading
The Forex Greeks And Strategies
We look at the different kinds of Greeks and how they can improve your forex trading. 
Trading
Using "The Greeks" To Understand Options
These riskexposure measurements help traders detect how sensitive a specific trade is to price, volatility and time decay. 
Investing
Types of Options
There are many different types of options. In addition to general put options and call option, we will discuss 13 different types of options. Some of these option types are better suited to day ... 
Trading
Stock Options: What's Price Got To Do With It?
A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price. 
Trading
Getting To Know The "Greeks"
Understanding price influences on options positions requires learning about delta, theta, vega and gamma. 
Investing
Getting Acquainted With Options Trading
Learn more about stock options, including some basic terminology and the source of profits. 
Trading
A Guide Of Option Trading Strategies For Beginners
Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons. 
Markets
How to Make Money by Trading Index Options
Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction.

Do options make more sense during bull or bear markets?
Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >> 
Are put options more difficult to trade than call options?
Learn about the difficulty of trading both call and put options. Explore how put options earn profits with underlying assets ... Read Answer >> 
Do you have to be an expert investor to trade put options?
Learn about investing in put options and the associated risks. Explore how options can provide risk, which is precisely defined ... Read Answer >> 
How can derivatives be used to earn income?
Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >> 
Are there any risks involved in trading put options through a traditional broker?
Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ... Read Answer >> 
How do speculators profit from options?
As a quick summary, options are financial derivatives that give their holders the right to buy or sell a specific asset by ... Read Answer >>