Rho (ρ) is a measure of the sensitivity of the price of a financial instrument to changes in interest rates. It is most commonly used in the context of options pricing, where it represents the amount by which the price of an option is expected to change in response to a change in interest rates.Rho is calculated using complex mathematical models that take into account the underlying asset, the time to expiration, the strike price, and other factors. It is typically expressed as a percentage.For example, consider a call option on a stock with a strike price of $100 and a time to expiration of six months. If the current interest rate is 2% and the rho of the option is 0.5%, this means that if interest rates increase by 1%, the price of the option is expected to increase by 0.5%. Conversely, if interest rates decrease by 1%, the price of the option is expected to decrease by 0.5%.Rho is one of the "Greeks" in options pricing, along with delta, gamma, theta, and vega. Together, these measures provide a way to analyze and understand the risks and rewards associated with options trading.
