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Risk free rate in Black-Scholes

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Risk free rate in Black-Scholes

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • October 17, 2021 at 4:50 pm #637899
    saifalikhan1022@gmail.com
    Member
    • Topics: 3
    • Replies: 0
    • ☆

    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?

    October 18, 2021 at 7:23 am #638130
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51561
    • ☆☆☆☆☆

    It 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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