Define the 'Risk-Free Rate' Input in the Model ⎊ Path

Define the ‘Risk-Free Rate’ Input in the Model.

The risk-free rate is the theoretical rate of return of an investment with zero risk, often proxied by the yield on short-term government securities, such as US Treasury bills, that mature close to the option's expiration date. In the Black-Scholes model, this rate is used to discount the expected future payoff of the option back to its present value.

A higher risk-free rate generally increases the value of a call option and decreases the value of a put option.

Why Is the Risk-Free Rate Typically Used in the Theoretical Futures Pricing Model?

Define “Risk-Free Rate” in the Black-Scholes Model

What Is the Difference between a Risk-Free Rate and a Risk-Adjusted Rate?

What Is the Role of the ‘Risk-Free Rate’ in the Black-Scholes Model and How Is It Determined for Crypto?

How Is the ‘Risk-Free Rate’ Assumption in Black-Scholes Adapted for Crypto Options?

What Is the Risk-Free Rate Concept in Arbitrage?

What Is Typically Used as the Risk-Free Rate Proxy in Traditional Options Markets?

Why Is Exercising an American Call Option Early to Capture a Large In-the-Money Value Still Usually a Poor Decision?

Glossar

Higher Risk-Free Rate

Volatility Premium ⎊ ⎊ A higher risk-free rate directly impacts the volatility premium demanded by option sellers, increasing the cost of hedging and consequently, the price of options across all strike prices.

Risk-Free Rate

Rate ⎊ The risk-free rate represents the theoretical return on an investment with zero risk, serving as a critical input in option pricing models to calculate the cost of carrying an asset forward in time, particularly relevant for valuing longer-dated crypto options.