New video on Quantitative Finance (Energy/Oil): Risk Free Rate

In the Classroom, a new video has been added to the online course 5.20.

This is a quantitative finance (energy) course with a focus on Option Contracts for crude oil.

This video explains the concept of risk free rate in this context.

We need to learn what the risk free rate is because later in the code (in a future video) we will use the risk-free rate for finding the price of the option contract.

Every option contract has a 'price' which is known as the 'premium', which we evaluate (later on) using Black Scholes.

An input parameter in Black Scholes is the risk-free rate.

The video explains that to find the risk-free rate we need to first check what our Option Contract is priced at. So, it is priced in US dollars because the Crude Oil is priced in US dollars.

Therefore we look at the United States.

Then we need to find the time-to-maturity. In our case, the Option expires 1 month from today. This is the example in our code.

With this information , we use our financial source like Bloomberg. And we check the 1-month yield of the U.S, Treasury Bill.

The US Government has zero risk of default (going bankrupt). Ofcourse In the real world, nothing is truly zero risk. But this is the assumption, which is widely accepted in finance.

A numerical example explains what our return will be one month after we invest in this zero-risk investment vehicle.

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