Welcome to the Term Structure Academy. Our goal is to demystify financial concepts and terminology, making them accessible to all.
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Welcome to the Term Structure Academy. Our goal is to demystify financial concepts and terminology, making them accessible to all.
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We now know from our previous blog post how Options are priced using the Black-Scholes model (or more complex iterations).
One of the inputs in this model is the interest rate, which is needed to get the right discounting / discount factor. Current Crypto models use Futures / Perp prices to get the risk free rate. Given these prices can fluctuate a lot, option contracts can get mispriced and arbitrageable.
In conclusion, having a reliable interest rate is essential for reliable pricing of more complex products such as Options. This is what Term Structure is working hard on!
We now know from our previous blog post how Options are priced using the Black-Scholes model (or more complex iterations).
One of the inputs in this model is the interest rate, which is needed to get the right discounting / discount factor. Current Crypto models use Futures / Perp prices to get the risk free rate. Given these prices can fluctuate a lot, option contracts can get mispriced and arbitrageable.
In conclusion, having a reliable interest rate is essential for reliable pricing of more complex products such as Options. This is what Term Structure is working hard on!
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