medium · Quantitative Finance

If the risk-free rate r increases, what is the effect on the reflection factor (H/S_0)^2λ in a Down-and-Out call price calculation (assuming H < S_0)?

1. The reflection factor increases because the barrier is more likely to be hit.
2. The reflection factor remains unchanged as it only depends on volatility.
3. The reflection factor decreases because λ increases.
4. The reflection factor becomes 1.

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