Impact of Borrowing Costs on Options

Borrowing costs significantly influence the pricing of options, particularly when traders need to borrow the underlying asset to facilitate arbitrage or hedging strategies. According to the put-call parity model, the cost of carry ⎊ which includes the interest rate paid to borrow the asset ⎊ is a key variable in determining the fair value of options.

If the cost to borrow a cryptocurrency is high, it creates a drag on the synthetic position, forcing the price of calls up and puts down relative to the underlying. In crypto markets, borrowing rates can be highly volatile, driven by demand for leverage and the availability of collateral within lending protocols.

When borrowing rates spike, it often leads to visible deviations in put-call parity as the cost of maintaining a short position in the underlying asset increases. Traders must carefully monitor these rates to accurately price their options and identify true arbitrage opportunities versus those caused by temporary spikes in lending demand.