FINA 4110 Slides 16 [Futures Options]

FINA 4110 Slides 16 [Futures Options] - Futures Options...

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Futures Options Chapter 16 1
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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 at previous settlement over the strike price 2
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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 at previous settlement 3
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The Payoffs If the futures position is closed out immediately: Payoff from call = F K Payoff from put = K F where F is futures price at time of exercise 4
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Potential Advantages of Futures Options over Spot Options z Futures contract may be easier to trade than underlying asset z Exercise of the option does not lead to delivery of the underlying asset z Futures options and futures usually trade in adjacent pits at exchange z Futures options may entail lower transactions costs 5
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Put-Call Parity for European Futures Options (Equation 16.1, page 347) Consider the following two portfolios: 1. European call plus Ke -rT of cash 2. European put plus long futures plus cash equal to F 0 e -rT They must be worth the same at time T so that c+Ke -rT =p+F 0 e -rT 6
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Other Relations F 0 e -rT K < C P < F 0 Ke -rT c > ( F 0 K ) e -rT p > ( F 0 K ) e -rT 7
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Binomial Tree Example
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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 16 [Futures Options] - Futures Options...

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