How Is the Black-Scholes Model Adapted for Use in Cryptocurrency Options?
The Black-Scholes model, while foundational, is adapted for crypto options by making adjustments for its unique characteristics. The model's assumption of continuous trading is often violated in crypto due to network congestion or exchange outages.
Furthermore, the interest rate component is often replaced by a "cost of carry" or funding rate from perpetual futures to account for the crypto asset's borrowing cost.
Glossar
Interest Rate Component
Yield ⎊ Within cryptocurrency derivatives and options trading, yield represents the anticipated return derived from an asset or contract, critically influenced by prevailing interest rate dynamics.
The Black-Scholes Model
Foundation ⎊ The Black-Scholes model serves as the cornerstone for modern options pricing theory, providing a continuous-time framework for calculating the fair value of derivatives.