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Unformatted text preview: Lecture 11: (Ch15&16) Options on Other Assets Index options o Extension of results for European options on nondividendpaying stock to European options on a stock paying a known dividend yield o Portfolio insurance Currency options Futures options I ndex Options The index options are settled in cash rather than by delivering the securities underlying the index. This means that upon exercise of the option, the holder of a call option receives SX in cash and the writer of the call pays this amount in cash. Similarly, the holder of a put option receives XS in cash and the writer of the option pays this amount in cash. Valuation of I ndex Options Extension of results from European options on nondividendpaying stock to European options on a stock paying a known dividend yield Similar to the way of taking care of cash dividend [SPV(D)], when valuing a European option on a stock paying a known dividend yield at rate q, we reduce the current stock price from S to S eq(Tt) and then value the option as though the stock pays no dividends. Replacing S by S eq(Tt) in the BS formulas given in (13.20) and (13.21), we have prices for call and put index options as If we assume that the value of stock index follows a riskneutral process of: dS = ( r q ) Sdt + Sdz o where q is defined as a known dividend yield then the prices of European call & put options are: Example Question Calculate the value of a threemonth atthemoney European call option on a stock index when the index is at 250, the riskfree interest rate is 10% per annum, the volatility of the index is 18% per annum, and the dividend yield on the index is 3% per annum. Using Binomial T rees to Price I ndex Options...
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This note was uploaded on 03/30/2011 for the course FIN 3635 taught by Professor Yip during the Three '11 term at University of New South Wales.
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