Risk free rate in Black-Scholes

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October 17, 2021 at 4:50 pm #637899
saifalikhan1022@gmail.com
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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
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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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