How Does a Breach Affect the ‘Risk-Free Rate’ Assumption in Option Pricing?

The risk-free rate is a theoretical rate of return on an investment with zero risk, a key input in the Black-Scholes model. A security breach in the underlying asset's network introduces systemic risk, making the asset itself no longer 'risk-free.' While the rate in the model is usually based on sovereign debt, a major breach could lead traders to implicitly demand a higher discount rate, effectively increasing the perceived cost of capital.