Rho

Rho, is the Greek that explains how sensitive the options is to changes in the risk free interest rate. If the options are seen as an investment in time, the interest rate is decisive in determining how expensive time is. Instead of buying options capital can always be banked. Rho explains how much the option price changes when the risk free interest rate is changed one percent.

Usually Rho borders on insignificance, with real meaning only for very long contracts. In other words, large changes in the interest rate are needed for Rho to have any particular influence in the option’s price – changes that are very rare in the macro economic climate of today.

For example, a call option with a Rho of 0.14 will rise 0.14 units if the interest rate goes up one percent. Even if it is theoretically a useful measure, Rho has a relatively small impact for the option premium – especially in comparison with its more powerful cousins.