The minimum expected return by an investor from risk free financial investments like treasury bills. This rate is considered when comparing alternate strategies and products to assess the incremental return potential associated with the additional risk in the position. This parameter is utilized in most option pricing models, including Black-Scholes in order to estimate the fair value of the option.
Any one of the mathematical formulas used to fairly price an option contract as a result of many factors, including: the underlying security's prevailing price, beta, Implied Volatility, time to expiry, dividends expected, current risk free interest rate, etc.[click to read more]