Sample Question #148 (finance – option pricing)
[I know you guys love option-pricing questions, so here’s another one!]
What happens to the price of an option when the interest rate goes to infinity?
(Comment: I don’t know why, but option pricing questions are very popular on the quant interview circuit, even when a position will not deal with options at all. Of course, if you admit up-front that you know nothing or little about options, you’ll be spared of such questions.)
ANSWER
As interest rate goes to infinity, option price tends to the stock price, all other things being equal. (Bonus question: why?) This is known as the marginal effect of interest rate.
Sorry, can I think this way:when the interest rate goes to infinity, everybody will save the money in the bank. Nobody trades stocks. Option prices is zero.