Lecture%2025 - Lecture 25 Stock Index Derivative Markets I....

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Stock Index Derivative Markets I. Stock Index options Stock Index options are options whose underlying instrument is a stock index. A) Cash Settlement Options on stock indexes are cash settled. Rather than taking delivery of an underlying asset, the holder of a cash settled option takes delivery of the cash value of the underlying asset. Cash settlement minimizes the transaction costs of index options. For example, rather than delivering the 100 stocks that make up the S&P 100 Index the writer of an S&P 100 option need only deliver the cash value of the index. B) Indexes S&P 100 S&P 500 Russell 2000 Nasdaq 1000 Internet Index Biotech Index Etc. C) Strategies Index options can be used to hedge risks Industry specific risks can be hedged using industry indexes (Banks, Internet…) Market wide risk (beta) can be hedged using options on stock indexes (S&P 500, S&P 100, NASDAQ 100) Index options can be used to make bets (or hedge) market variance without taking market risk (beta = 0)
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This note was uploaded on 04/12/2008 for the course ECON 435 taught by Professor Chabot during the Winter '08 term at University of Michigan.

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Lecture%2025 - Lecture 25 Stock Index Derivative Markets I....

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