Sheldon Natenburg in his book Option Volatility and Pricing in the chapter on Risk Management is trying to explain the effect of interest rates on options.

He says

The value of a stock option will also depend on whether the trader has a long or short stock position. If a trader's option also includes a short stock position, he is effectively reducing the interest rate by the borrowing costs required to sell the stock short. This will reduce the forward price, thereby lowering the value of calls and raising the value of puts.

I understand that there is a cost to borrowing the stock but how does this "lower the interest rate"? Can someone show me this effect using an arbitrage/replication/hedging example?



Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Browse other questions tagged or ask your own question.