Black-Scholes Model & Interest Rates

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!