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The Year-End Toll: Frictions Embedded in Option-Implied Rates

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  • Useong Shin

Abstract

Option-implied rates are often treated as frictionless because completed boxes deliver riskless payoffs. I show that this interpretation requires option- and benchmark-side implementation wedges to offset. Using SPX and RUT options from 2012-2025, I find a 2-3 bp unannualized increase in the option funding basis when maturity first crosses December 31. The effect behaves as a fixed price wedge, strengthens in the mid-2010s, survives alternative contracts and benchmarks, appears independently in government-bond CIP, and is reproduced in an independently constructed option panel. Put-call parity can identify discount rates precisely without establishing their economic purity.

Suggested Citation

  • Useong Shin, 2026. "The Year-End Toll: Frictions Embedded in Option-Implied Rates," Papers 2609.20224, arXiv.org.
    • Handle: RePEc:arx:papers:2609.20224
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    References listed on IDEAS

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    1. Matthias Fleckenstein & Francis A Longstaff & Stijn Van Nieuwerburgh, 2020. "Renting Balance Sheet Space: Intermediary Balance Sheet Rental Costs and the Valuation of Derivatives," The Review of Financial Studies, Society for Financial Studies, vol. 33(11), pages 5051-5091.
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