15. Options, Futures and Other Derivatives Ch4: Interest Rates Part 3

[@danqiao8378]

Hi, Mark. Your videos have been a big help to me. Thank you so much for that. However, I have a question due to this video in which you made Rm = m*(e^Rc-1). Shouldn't it be e^Rc/m instead?

[@MarkMeldrum]

It should. There are some places where when I am writing it out on the screen, I make printing mistakes.

[@yicancu56]

So is the reference rate the Treasury rate? How do we choose the risk free rate? From what I get here its the value of the portfolio after using derivatives to make it risk free. I have never bought derivatives but I always thought you don't set the price. I feel like I'm missing something here.

[@anastasiosdemertzis107]

The risk free rate is a theoretical concept and subjective to one's interpretation of what is risk free. Practically, and in general, the risk free rate is the 3 month US T-Bill and it is the one used as a proxy for the risk free rate for investors since the probabilities of the US Gov't defaulting are that low that is considered a risk free investment