Risk free rate of interest in Option Pricing

AA9y ago

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!

John MoffatTutor9y ago#1

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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