Ch16 - Futures Options Chapter 16 1 Mechanics of Call...

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Unformatted text preview: Futures Options Chapter 16 1 Mechanics of Call Futures Options When a call futures option is exercised the holder acquires 1. A long position in the futures 2. A cash amount equal to the excess of the futures price over the strike price 2 Mechanics of Put Futures Option When a put futures option is exercised the holder acquires 1. A short position in the futures 2. A cash amount equal to the excess of the strike price over the futures price 3 The Payoffs If the futures position is closed out immediately: Payoff from call = F 0 K Payoff from put = K F where F is futures price at time of exercise 4 Potential Advantages of Futures Options over Spot Options Futures contracts may be easier to trade than underlying asset Exercise of option does not lead to delivery of underlying asset Futures options and futures usually trade side by side at an exchange Futures options may entail lower transactions costs 5 Put-Call Parity for Futures Options (Equation 16.1, page 337) Consider the following two portfolios: 1. European call plus Ke-rT of cash 2. European put plus long futures plus cash equal to F e-rT They must be worth the same at time T so that c+Ke-rT =p+F e-rT 6 Other Relations F e-rT K < C P < F Ke-rT c > ( F K ) e-rT p > ( F K ) e-rT 7 Binomial Tree Example...
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This note was uploaded on 06/26/2011 for the course BUS 316 taught by Professor N/a during the Spring '09 term at Simon Fraser.

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Ch16 - Futures Options Chapter 16 1 Mechanics of Call...

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