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I am looking at the historical treasury interest rates and am uncertain which rates would be best to use for options pricing.

Should I use 1 month, 6 month, 2 year?

See: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx

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2 Answers 2

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This is why the rate used is the risk-free rate.

Except its not. Cost of capital is used for the forward (price of total return swap), cost of collateral (OIS for OTC, box rates for listed) is used for the discounting.

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    $\begingroup$ Do you mean that the value to be inputted in a BS pricer should not be the risk-free rate? $\endgroup$
    – SRKX
    Mar 2, 2015 at 9:20
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the length of rate which closest corresponds to the maturity of the option. This will be true opportunity cost of having capital tied up in option positions with regard to the risk free rate.

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  • $\begingroup$ I agree with the rate tenor. The reason however has to do with the Black-Scholes risk-neutral pricing framework, and not with the cost of capital tied up in the position. This is why the rate used is the risk-free rate. $\endgroup$
    – jaamor
    Dec 5, 2014 at 20:30

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