Why Is the Choice of the ‘Risk-Free Rate’ a Challenge When Calculating IV for Crypto Options?
The challenge arises because there is no universally accepted, truly risk-free asset in the crypto space comparable to government bonds. Stablecoin lending rates are often used, but they carry counterparty and smart contract risk.
The choice of rate can significantly impact the calculated Implied Volatility (IV).
Glossar
Implied Volatility
Expectation ⎊ This value represents the market's consensus forecast of future asset price fluctuation, derived by reversing option pricing models using current market premiums.
Historical Volatility
Evidence ⎊ This metric is derived from the time-series of past asset prices, representing the actual realized dispersion of returns over a defined historical window.
Stablecoin Lending
Collateral ⎊ Stablecoin lending protocols fundamentally rely on overcollateralization, a mechanism where borrowers deposit assets exceeding the value of the loan they seek.