Discount rate

Non-banks need to consider the discount rate they use, but there is no simple
answer. Banks blithely reach for LIBOR in nearly any situation because that is the
rate at which they can lend and borrow in the market (unless they are beset by
rumours of impending bankruptcy). A non-bank may well face a rather higher rate
for loans, although it should be able to obtain a rate very similar to the banks for
deposits. Thus if an industrial organization is short of cash it might consider valuing
future predicted cashflow streams at its cost of borrowing.
Otherwise if LIBOR is used, a trader would appear to make profits on inception for
loans to counterparties at rates above LIBOR but below the organization’s cost of
borrowing, although this profit would leak away as the real cost of funding was
recognized over time. However, it does not seem sensible for such an organization
valuing options using the Black–Scholes model to use anything other than LIBOR as
the input parameter. This is an area where consensus has not yet been reached.