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Risk free rate of interest in Option Pricing

This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.

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November 26, 2016 at 10:43 am #351591
aadya
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Hi John,
Could you explain how risk free rate of interest has an affect on the value of options? I have watched the relevant lecture and read the notes from the chapter, but I am still having difficulty in understanding the concept. I am clear with the other factors affecting the value of option.
Thanks in advance!
November 26, 2016 at 11:21 am #351611
John Moffat
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Because the fact that the option will be exercised on a date in the future, we need to account for the time value of money – paying out in (say) 6 months time, is not the same as paying out ‘now’ because of the interest for those 6 months.
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