Respected sir,
I want to know as to what is the reason behind using a risk-free rate in the calculation of the value of the option using the BSOP model.
How does the risk-free rate affect the value of the option?
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Risk free rate in Black-Scholes
4y ago#1It is because the risk (i.e. volatility) of the share price is taken account of separately in the formula.
As the risk-free rate increases, the value of a call option increases.
However, as the risk-free rate increases, the value of a put option decreases.
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