In Black Scholes model r is defined as risk free interest rate. Could you please explain what is risk free? Is it same as interest rate on checking account?


Generally speaking, a risk-free rate refers to the yield you get on a government bond (read more here).

On a checking account there's a possibility that the bank would fail. Yes, it's FDIC insured, but up to \$250K.

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    $\begingroup$ +1 I would just add that it’s not just any government bond. It has to be bond of a country where default probability is for all practical purposes 0 (Germany, Switzerland, USA etc) $\endgroup$ – 1muflon1 Jan 29 at 10:33

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