FedFunds effective is an overnight rate... While it probably will make very little difference, you should use the other, term rates which correspond to the time to expiry of your option. All the rates given are annualised, so if you got the right numbers, you don't need to do anything more.
I think I have been a bit confused of what is actually correct When looking at: http://www.federalreserve.gov/Releases/h15/data.htm I can for example find those: Nominal 10: 1-month 2016-09-27,0.16 Federal funds (effective) 2016-09-27,0.40 If we now want the "risk free rate" for 30 DTE and 60 DTE, is any of those numbers correct to use. I still wonder if YAHOO finance has this risk free rate as it is easy to get the rates via an API/URL call there? I am simply not sure what tickersymbol to look for?
For 30 DTE use the first, i.e. "nominal 1-month". For 60 DTE, interpolate between the 1-month and 3-month.
Regarding "interpolating" the interest rates to precisely match the DTE of the options... Consider this first, which implies it may NOT be the proper thing to do. While this context (CBOE VIX White paper page 5 of 23) is used by CBOE for deriving VIX; my best guess would be to not interpolate from the closest expiration dates for the interest rate to be used for BSM. {my take from reading between the lines} "The risk-free interest rates, R1 and R2, are the bond-equivalent yields of the U.S. T-bill maturing closest to the expiration dates of relevant SPX options. As such, the VIX calculation may use different risk-free interest rates for near- and next-term options. "
I think a better way is to get implied riskfree rate and dividend rate from option prices. That way you'll be sure to get the same implied volatility as it has been priced by the market.
How do you plan to do that? Isn't this, basically, going to involve solving an equation with two unknowns?
You're not reading between the lines correctly. Just trust me on this, interpolation is the right thing to do.
No Martin, it doesn't. By simply using call/put parity you'll be able to find both rates. It has been used for decades, nothing new here !