Put option value and risk free rate curve


The US Federal Reserve is expected to chrve the interest rates in coming months. ;ut rate changes impact the overall economy, stock optiob, bond market, other metatrader ema indicator ranges markets and can influence macroeconomic factors. A change in interest rates also impacts option valuation, which is a complex task with multiple factors, including the price of the underlying asset, exercise or strike price, time to expiry, risk-free rate of return (interest rate), volatility, and dividend yield.

The risk free interest rate is the theoretical interest rate that would be returned on an investment completely free of risk, generally taken to be the yield on 3 month Treasury Bills.At first glance it is a bit hard to imagine why this would affect option prices. As we know, call options give the owner of the option the right to buy the underlying stock at the strike price. And we know that the writer of the option is obligated to sell shares to the holder of the option at the strike price.

Now, we want to build on that and cover the option risk characteristics of a call and put. Option Risk ProfileWe went over the basics of puts and put option value and risk free rate curve in our introduction to options. I believe examples in this section would be the best way to cover this topic. We are going to start with a LONG CALL example. If the risk free interest rate is 5% the call will be priced assuming at expiration the stock will be over.




Put option value and risk free rate curve

Put option value and risk free rate curve