risk-free rate in option pricing

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risk-free rate in option pricing

Xian Li
Hi,

As an input for option pricing models (e.g. GBSOption from fOption), how's the risk-free rate of return usually calculated? Shall we just find any T-bill whose maturity date matches the option expiration date and use its value to calculate the compound yield? Are there any existing functions for doing this?

Thanks!

Xian Li
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Re: risk-free rate in option pricing

Arun.stat
Dear Xian, as per the Hull's book you should consider a T-Bill with same maturity as the underlying option contract (as you also said correctly.) However just make sure that, that rate is expressed in continuous compounding.

I can also remember that this topic was previously discussed in details here (just make a search.)

HTH,

Thanks and regards,

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Arun Kumar Saha, FRM
QUANTITATIVE RISK AND HEDGE CONSULTING SPECIALIST
Visit me at: http://in.linkedin.com/in/ArunFRM
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