Which factor affects option premiums by increasing their value as their rates rise?

Short-term interest rates directly influence option premiums because they impact the cost of carry associated with holding the underlying asset. As interest rates rise, the opportunity cost of holding an asset that does not generate income (like a stock without dividends) increases, making options more attractive as a hedging mechanism or speculative tool. This increased demand for options typically leads to higher premiums.

When interest rates increase, it also affects the pricing models used to calculate option values, such as the Black-Scholes model. Within these models, higher interest rates can increase the present value of the strike price for call options, thereby increasing their value. As a result, both the market participants' behavior and the mathematical valuation of options are influenced by rising short-term interest rates, which collectively drive up option premiums.