Does the Presence of High Interest Rates Increase or Decrease the Value of the Early Exercise Feature?
High interest rates generally decrease the value of the early exercise feature for a call option. This is because delaying the exercise allows the holder to keep the cash (the strike price) invested for a longer time, earning more interest.
For put options, high interest rates increase the value of the early exercise feature.
Glossar
High Interest Rates
Yield Differential Analysis ⎊ High Interest Rates offered by lending protocols or stablecoin farms signal either an exceptionally high demand for borrowing that specific asset or a corresponding high level of embedded risk being priced into the rate.
Exercise Feature
Decision ⎊ The exercise feature grants the holder of a long option the unilateral right, but not the obligation, to execute the contract at the agreed-upon strike price before or at expiration.
Early Exercise
Trigger ⎊ Early exercise, within cryptocurrency options and financial derivatives, denotes the right ⎊ but not the obligation ⎊ of the option holder to realize the intrinsic value of the contract prior to its scheduled expiration date.
Interest Rates
Rate ⎊ The prevailing cost of borrowing funds, expressed as an annualized percentage, fundamentally influences asset valuation across cryptocurrency derivatives, options trading, and traditional financial markets.