All termsOption Pricing and ValueWorth knowing
Risk Free Rate
The risk free rate is a theoretical reference interest rate used in financial valuation models to represent the return on an investment with minimal assumed default risk over a relevant period. Option pricing models use an interest rate input as part of valuing future cash flows and exercise prices.
Why it matters to you
Interest rates affect option values, although their practical impact may be less visually obvious to beginners than changes in the underlying price, time or volatility. The Greek Rho measures sensitivity to changes in interest rates.
Terms that sit next to this one
Interest Rate