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

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.