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# topic07_pres - EC372 Bond and Derivatives Markets Options...

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Unformatted text preview: EC372 Bond and Derivatives Markets Options III: Applications R. E. Bailey Department of Economics University of Essex University week 22 EC372 Bond and Derivatives Markets Options III Topic #7 Outline 1 Stock Index Options 2 Options on Futures Synthetic futures 3 Interest rate options 4 Options and Portfolio Risks 5 Portfolio insurance Reading: Economics of Financial Markets , chapter 20 EC372 Bond and Derivatives Markets Options III Topic #7 Outline Stock Index Options Stock index options I Main difference from single company options: ‘exercise’ requires cash settlement Example: FT-SE 100 index option I European style I Quotation: Index points, each point worth £10. I Tick size: 0.5 point, worth £5. I Delivery dates: end of March, June, September, December + four nearest months I Example: I Suppose that c = 150, June expiry, exercise price of 5000 I Buy 1 option for £1500 = 10 × 150. I End June, suppose that FTSE-100 index = 5300. I Exercise option for £3000 = ( 5300- 5000 ) × 1 × 10 I Net gain: £1500 = 3000- 1500 I Prior to end June, option could have been sold. EC372 Bond and Derivatives Markets Options III Topic #7 Outline Stock Index Options Stock index options I Main difference from single company options: ‘exercise’ requires cash settlement Example: FT-SE 100 index option I European style I Quotation: Index points, each point worth £10. I Tick size: 0.5 point, worth £5. I Delivery dates: end of March, June, September, December + four nearest months I Example: I Suppose that c = 150, June expiry, exercise price of 5000 I Buy 1 option for £1500 = 10 × 150. I End June, suppose that FTSE-100 index = 5300. I Exercise option for £3000 = ( 5300- 5000 ) × 1 × 10 I Net gain: £1500 = 3000- 1500 I Prior to end June, option could have been sold. EC372 Bond and Derivatives Markets Options III Topic #7 Outline Stock Index Options Stock index options I Main difference from single company options: ‘exercise’ requires cash settlement Example: FT-SE 100 index option I European style I Quotation: Index points, each point worth £10. I Tick size: 0.5 point, worth £5. I Delivery dates: end of March, June, September, December + four nearest months I Example: I Suppose that c = 150, June expiry, exercise price of 5000 I Buy 1 option for £1500 = 10 × 150. I End June, suppose that FTSE-100 index = 5300. I Exercise option for £3000 = ( 5300- 5000 ) × 1 × 10 I Net gain: £1500 = 3000- 1500 I Prior to end June, option could have been sold. EC372 Bond and Derivatives Markets Options III Topic #7 Outline Stock Index Options Stock index options I Main difference from single company options: ‘exercise’ requires cash settlement Example: FT-SE 100 index option I European style I Quotation: Index points, each point worth £10....
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topic07_pres - EC372 Bond and Derivatives Markets Options...

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