FINA 4110 Slides 15 [Options on Stock Indices and Currencies]

FINA 4110 Slides 15 [Options on Stock Indices and Currencies]

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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 risk-free rate is 12% per annum z The dividend yield on both the portfolio...
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This note was uploaded on 03/03/2012 for the course FINA 4110 taught by Professor Liu during the Spring '11 term at CUHK.

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FINA 4110 Slides 15 [Options on Stock Indices and Currencies]

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