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michaelyin
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Posts: 8
Joined: June 26th, 2019, 12:08 pm

How is Repo impact call option in black scholes pricing

September 29th, 2021, 2:23 pm

I read from some research papers that repo should be used as "r" in the BSM. However, when we increase repo, it decreases the value of the call option, while black sholes tell us increasing interest rate will increase call option value. Does anyone has an idea?
 
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bearish
Posts: 5186
Joined: February 3rd, 2011, 2:19 pm

Re: How is Repo impact call option in black scholes pricing

September 29th, 2021, 11:41 pm

Umm - I’m guessing you’re doing it wrong. The interest rate shows up in a couple of places. It changes the forward price of the underlying asset and it changes the discount rate applied to the (risk neutral) expected payoff. If you miss one of those, you may not get what you’re looking for.
 
michaelyin
Topic Author
Posts: 8
Joined: June 26th, 2019, 12:08 pm

Re: How is Repo impact call option in black scholes pricing

October 1st, 2021, 4:46 am

Increasing interest rate increase call option price, no?
 
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bearish
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Joined: February 3rd, 2011, 2:19 pm

Re: How is Repo impact call option in black scholes pricing

October 2nd, 2021, 10:51 am

Correct. So if you observed the opposite effect, something went wrong. Maybe the “repo rate” you encountered had something to do with stock borrow cost?
 
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animeshsaxena
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Joined: June 19th, 2008, 2:56 pm

Re: How is Repo impact call option in black scholes pricing

October 9th, 2021, 10:26 am

Maybe u mean rate - repo - div

Increase repo will lead to forwards going down and hence call value decreasing. Commonly referred to as implied repo in trader lingo