Good question. The risk free rate is used in pricing options. (Rho would be the corresponding greek). You want to plug in the value a ‘risk free investment’ should currently return. So for example selling a [zero coupon] bond. The whole BSM framework assumes that you sell a bond to finance your dynamic delta hedging. We can cover that in detail in a video. Basically you can look at the Fed Fund Rate or the current Treasury Bill Rate say for a 90 day bond for a starting point / baseline. The default of .9 should be in the neighborhood of the current 90 Day Treasury Bill. Of course, you can plug in a different value that’s way it’s not hard coded. Basically it’s what you can expect to earn on current ‘risk free investment.’
No audio?
I haven’t (yet) heard from anyone else having audio issues. What platform / browser are you using ( I.e. windows 8 / IE 9)?
No problems, using windows XP, Firefox
audio/video skip of about 6 min in middle of the video…i’m using IE9
Thank you… one follow up question, who is your internet service provider? Thanks in advance.
Enjoyed your video, it helped to clear up some of the questions I have. I liked your stating the best environment for which strategy.
good video….I wasn’t clear on what the ‘Risk Free Rate’ was in the Option Calculator. Where did U get that .9 figure?
Good question. The risk free rate is used in pricing options. (Rho would be the corresponding greek). You want to plug in the value a ‘risk free investment’ should currently return. So for example selling a [zero coupon] bond. The whole BSM framework assumes that you sell a bond to finance your dynamic delta hedging. We can cover that in detail in a video. Basically you can look at the Fed Fund Rate or the current Treasury Bill Rate say for a 90 day bond for a starting point / baseline. The default of .9 should be in the neighborhood of the current 90 Day Treasury Bill. Of course, you can plug in a different value that’s way it’s not hard coded. Basically it’s what you can expect to earn on current ‘risk free investment.’
Josh, your videos are exactly what we expect from OMM
Thanks for the feedback, it’s appreciated, we will continue to fill out the tutorial content. Cheers, Josh.