Interest Rate There are a number of different interest rates in related literature. But when dealing with pricing options we use continuously compounded interest rates. Continuous Interest Rate (A.1.1) This makes it possible to alter the interest rates on a daily basis during the time . Usually this rate is assumed to be constant during this time. (A.1.2) Periodical Interest Rate (Simple Interest Rate) Suppose that the rate is being paid after a period of . During this period we get an interest rate of . The important thing is that we do not receive any interest during this period. (A.1.3) Effective Interest Rate In this case the interest is paid periodically. The length of the period could be anything, but is expressed in years. (A.1.4) Translation Between Simple and Continuous Interest Rate A simple interest rate, for example the user risk parameters for risk free interest rate and dividend yield, is converted to continuous interest rate in the following way: (A.1.5) T equals time between evaluation and expiration day (actual/).
Interest Rate There are a number of different interest rates in related literature. But when dealing with pricing options we use continuously compounded interest rates. Continuous Interest Rate (A.1.1) This makes it possible to alter the interest rates on a daily basis during the time . Usually this rate is assumed to be constant during this time. (A.1.2) Periodical Interest Rate (Simple Interest Rate) Suppose that the rate is being paid after a period of . During this period we get an interest rate of . The important thing is that we do not receive any interest during this period. (A.1.3) Effective Interest Rate In this case the interest is paid periodically. The length of the period could be anything, but is expressed in years. (A.1.4) Translation Between Simple and Continuous Interest Rate A simple interest rate, for example the user risk parameters for risk free interest rate and dividend yield, is converted to continuous interest rate in the following way: (A.1.5) T equals time between evaluation and expiration day (actual/).
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