How Does the Cost of Carry for a Cryptocurrency (E.g. Staking Yield) Factor into Option Pricing Models?
The cost of carry for a cryptocurrency, such as a staking yield or a funding rate from a perpetual swap, is incorporated into option pricing models by adjusting the "risk-free rate" input. In the Black-Scholes framework, the dividend yield for stocks is subtracted from the risk-free rate.
Similarly, a continuous yield like staking reward or lending interest (the cost/benefit of holding the underlying asset) is factored in. This adjustment is crucial because it affects the forward price of the underlying asset, which in turn influences the option's theoretical value.
Glossar
Staking Yield
Reward ⎊ Staking yield, within cryptocurrency contexts, represents the remuneration received for participating in network consensus mechanisms, typically expressed as an annualized percentage of staked assets.
Cost of Carry
Holding ⎊ The cost of carry, within cryptocurrency derivatives and options trading, represents the aggregate expenses incurred while maintaining a position over a specified duration.
Pricing Models
Model ⎊ Within cryptocurrency derivatives and financial engineering, pricing models represent formalized frameworks quantifying the theoretical fair value of assets or contracts.
Risk-Free Rate
Determinant ⎊ A risk-free rate, within cryptocurrency derivatives, represents the theoretical return on an investment with zero risk of financial loss over a given period, often proxied by yields on highly-rated sovereign debt denominated in a stable currency like the US Treasury yield.
Negative Cost of Carry
Arbitrage ⎊ Negative cost of carry emerges within cryptocurrency derivatives markets, particularly concerning perpetual swaps and futures, where funding rates can invert, creating a scenario where short positions accrue a yield.