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

RESUMO

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 mid-2010s, survives alternative contracts and benchmarks, and appears independently in government-bond CIP, is reproduced in an option-constructed panel. Put-call parity can identify discount rates precisely without establishing their economic purity.