Option Returns and the risk-free Rate in Crypto Asset Markets

Abstract

Contrary to expectations some years ago, the crypto market has matured and gives the impression of an established financial ecosystem. Certainly, some deviations from robustness, typically reflected in event-related volatility bursts and spikes, are observed, but a liquid derivatives market has been established, at least for the dominant digital assets. Every currency, including cryptos, has an interest rate that can be derivable from the corresponding futures. Evaluating observable crypto options prices one expects a match with an implied risk-free rate. However, for small maturities and at-the-money prices, one sees substantial risk premia. A similar phenomenon has been observed in the nineties for the stock market. We provide a solid data analysis to support these observations and sketch a short trading quantlet. The findings of this study have significant implications for the determination of a reference interest rate in the crypto space as well as for market participants and traders with exposure to futures and options written on crypto assets.

Keywords: JEL Classification: C14, C50, G10 Bitcoin, Ether, Deribit, risk premium, volatility premium, option, risk-free rate, perpetual future

JEL Classification: C14, C50, G10