What Is the Relationship between Interest Rates and Option Pricing?
Interest rates are one of the inputs in the Black-Scholes option pricing model. Higher interest rates generally increase the premium of a Call Option and decrease the premium of a Put Option.
This is because higher rates reduce the present value of the strike price (making a Call more valuable) and increase the cost of carrying the underlying asset (making a Put less valuable).
Glossar
Interest Rate Environment
Calibration ⎊ The interest rate environment, within cryptocurrency derivatives, functions as a critical calibration parameter for pricing models, notably those employing stochastic volatility frameworks like Heston.
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.
Higher Interest Rates
Impact ⎊ Higher interest rates directly impact the theoretical valuation of options through the Rho Greek, which measures the option price sensitivity to the risk-free rate.