Embedded options in structured products carry nuanced interest rate exposure. In this analysis, we explore how Rho affects valuation and why the so-called “risk-free” rate is never truly risk-free.
Interest rates play a varying role in all derivatives and that’s sometimes difficult to analyse. It starts with the critical role of the non-existent risk-free rate. The risk-free rate is a fundamental component in various financial models, including the Black-Scholes model for derivatives pricing We will explore that in our series of articles dedicated to structured products and risk management with the Greeks (and beyond). The concept of risk-free rate in finance The risk-free rate