This preview shows pages 1–7. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Options on Stock Indices and Currencies Chapter 15 1 Index Options z The most popular underlying indices in the U.S. are z The S&P 100 Index (OEX and XEO) z The S&P 500 Index (SPX) z The Dow Jones Index times 0.01 (DJX) z The Nasdaq 100 Index (NDX) z Contracts are on 100 times index; they are settled in cash; OEX is American; the XEO and all other options are European. 2 Index Option Example z Consider a call option on an index with a strike price of 560 z Suppose 1 contract is exercised when the index level is 580 z What is the payoff? 3 Using Index Options for Portfolio Insurance z Suppose the value of the index is S and the strike price is K z If a portfolio has a β of 1.0, the portfolio insurance is obtained by buying 1 put option contract on the index for each 100 S dollars held z If the β is not 1.0, the portfolio manager buys β put options for each 100 S dollars held z In both cases, K is chosen to give the appropriate insurance level 4 Example 1 z Portfolio has a beta of 1.0 z It is currently worth $500,000 z The index currently stands at 1000 z What trade is necessary to provide insurance against the portfolio value falling below $450,000? 5 Example 2 z Portfolio has a beta of 2.0 z It is currently worth $500,000 and index stands at 1000 z The riskfree rate is 12% per annum z The dividend yield on both the portfolio...
View
Full
Document
This note was uploaded on 03/03/2012 for the course FINA 4110 taught by Professor Liu during the Spring '11 term at CUHK.
 Spring '11
 Liu
 Options

Click to edit the document details