Rho

Might be a pretty simple question, but what is the interest rate the Rho is based on?

 

Rho is derived from an option pricing model, so whichever interest rate you use in the pricing model is the rate that Rho is based on.

 

Right, but Rho shows the change in the premium based on a change in the interest rate right? So is there a commonly used interest rate in option pricing models?

 

IMHO, it should be whatever rate you fund yourself at (e.g. 3M LIBOR)... There's an alternative view that suggests using the rate used by the majority of mkt participants.

Which one to choose is a tricky question that's been discussed here in an older thread.

 

Thanks for that, Ill look that thread up.

 

Rho shows the change based on the interest rate you used. So if you used 1% then Rho shows changes relative this rate rate.