How Does the Concept of “Borrowing Cost” Relate to the Interest Rate in Options Pricing?

The interest rate in the options pricing model represents the risk-free rate, which is the theoretical cost of borrowing or lending money. This rate is used to calculate the future value of the underlying asset (in the case of a call) or the present value of the strike price (in the case of a put).

Higher borrowing costs increase the cost of carrying the underlying asset, which in turn increases the price of call options and decreases the price of put options.