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What is the effect of interest rate volatility on callable options and puttable options?
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- How is the call option price impacted by varying the risk free rate of interest? How is the call option price impacted by varying the volatility?What is the relationship between forward rates and the market’s expectation of future short rates? Explain in the context of both the expectations hypothesis and the liquidity preference theory of the term structure of interest rates.How does the Liquidity Premium Theory influence the market interest rate?