Rist-free rate on the option price

CFA Level I Derivatives
#1

Hello all,

I can’t understand how the free-risk rate affects option value. Why a decrease in risk-free rate of interest will decrease call option values and increase put option values? Who can help me and give an example how it works?

#2

Take a look at put-call parity.

#3

European Call is worth S - Ke^-rt so if r increases, Ke^-rt decreases.

#4

:+1:

I wish I had used this approach when I struggled through options!