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Rho

Rho is an essential concept in options pricing which forms part of the five primary Greek letters used to value derivatives. Rho measures the expected change in an option’s price in response to a change in the risk-free interest rates. Essentially, it depicts the sensitivity of an option’s price to changes in interest rates.

For instance, if an option has a Rho of 0.05, the option’s theoretical price will increase by 0.05 units for each percentage point increase in interest rates. It’s important to note that Rho is more significant for longer-term options as they are much more sensitive to changes in the risk-free interest rate.

Rho is particularly useful for investors who hold a portfolio of options, as it helps them to estimate their options price risk related to interest rate fluctuations. And while it might not be as widely recognized as delta, gamma, theta, or vega, having an understanding of rho can add another tool to an investor’s risk management arsenal. As with all Greeks, Rho is a theoretical measure and should be used carefully, understanding that actual results may vary.

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