Do option premiums include inflation rate in it's pricing?


#1

@nithin @Sensibull

I know that the risk free rate effects option pricing according to the black and scholes model but if inflation is 4.5% for this year then will the option premiums increase by the inflation rate keeping other variables constant?


#2

Change in Inflation then there might change in Interest rates from RBI MPC with other factors considered. The factor of inflation is indirectly include through interest rates hikes or reductions. That’s my understanding.


#3

A little far fetched. In the sense economics does not affect interest rates immediately. Also liquidity is something which affects the short end of the interest rate curve. So even if interest rates are low, the liquidity can cause short term high rates - Mibor in this case. So although you are largely on the right track this need not happen