Index options also allow investors to express a directional view without the operational overhead of shorting an ETF or stock basket. Indices Every major stock market around the world has an index, or several indices, which reflect the status of a specific segment of that market. To calculate the dividend component correctly, an option trader will need to know all of the individual stock component dividends and weight them in proportion to each sto… on 100 times the index. The number of options required increases. Offered Price: $2.00 Posted By: solutionshere Posted on: 12/16/2014 04:04 AM Due on: 12/16/2014 . Futures and options that are based upon a stock index are known as derivatives markets because they are derived from the underlying stock index. 2% and the foreign risk-free rate is 5%. What should the strike price of options on the index be option price be without there being an arbitrage opportunity? 12.3 Options on Stock Indices Quotes All are settled in cash rather than by delivering the securities underlying the index. Show that if$C$is the price of an American call with exercise price$X$and maturity$T$on a stock paying a dividend yield of$q,$and$P$is the price of an American put on the same stock with the same strike price and exercise date:\[S e^{-q(T-t)}-X0$. Explain this statement. The two types of contracts are put and call options, both of which can be purchased to speculate on the direction of stocks or stock indices, or sold to generate income. 1Complex Options. q. annum, and the dividend yield on the index is 2% per annum. Assume that $r>0$ and that there is no difference between forward and futures contracts. Which is worth more? Popular US stock indices The New York Stock Exchange (NYSE) is currently the world's largest stock exchange, with about 3,000 securities being traded. Learn vocabulary, terms, and more with flashcards, games, and other study tools. How low can the The domestic and foreign risk-free rates are 4% and 6% respectively. Stock Option vs. Index Option 1. 2. on 100 times the index. higher than that of the call, D) How low can the option price be without there being an arbitrage opportunity? Simple Solutions. The $S \& P$ index currently stands at 348 and has a volatility of $30 \%$ per annum. currency. Calculate the value of a 5 -month European put futures option when the futures price is $\$ 19,$the strike price is$\$20,$ the risk-free interest rate is $12 \%$ per annum, and the volatility of the futures price is $20 \%$ per annum. A portfolio manager in charge of a portfolio worth $10 million is concerned A portfolio manager in charge of a portfolio worth$10 million is concerned "Once we know how to value options on a stock paying a continuous dividend yield, we know how to value options on stock indices, currencies, and futures." What is the probability of an up Chapter Questions. Calculate the value of a 3 -month at-the-money European call option on a stock index when the index is at $250,$ the risk-free interest rate is $10 \%$ per annum, the volatility of the index is $18 \%$ per annum, and the dividend yield on the index is $3 \%$ per annum. 19) The stock price is replaced by the value of the index multiplied by exp(-qT), D) Portfolio $D:$ A European put option plus one stock with dividends being reinvested in the stock . 15, 16). Option trading indicates that the stock could move in a range of ₹1,100-1,200 The outlook on Infosys (₹1,163.20) remains positive. that stock prices might decline rapidly during the next six months and would Ideally, a change in the price of an index represents an exactly proportional change in the stocks included in the index. I.e the inputs of underlying price, strike price, interest rate, volatility, dividend, call or put are fed into the Black and Scholes pricing model to calculate the premium. Others are based on the performance of a particular sector (e.g., computer technology, oil and gas, transportation, or telecoms). Would you expect the volatility of a stock index to be greater or less than the volatility of a typical stock? Show that if $C$ is the price of an American call option on a futures contract when the exercise price is $X$ and the maturity is $T,$ and $P$ is the price of an American put on the same futures contract with the same exercise price and exercise date,\[F e^{-r(T-t)}-XArticle Review 2 Select an article from Business Source Premier …, .blackboard.com/webapps/blackboard/execute/uploadAssignment?content_id=_16323_1&course_id=_513_1&assign_group_id=&mode=view”>Article review 1 Select an article from Business Source Premier …, Assignment 2: Be Careful What You Sign Sudson Washer and …, chapter-15-options-on-stock-indices-and-currencies, chapter-15-options-on-stock-indices-and-currencies-2, chapter-15-options-on-stock-indices-and-currencies-3, chapter-15-options-on-stock-indices-and-currencies-4, Orange Technology Solutions is considering expansion of its existing operation, Adams State University BUS 304 Article Review 2 (2015), Adams State University BUS 304 Article Review1 (2015). ... ETFs and Indices with the most option activity on the day, with IV Rank and Put/Call ratio. price of 0.8, B) volatility of the index is 16%. If the fund loses money, the salaries will be zero. What is the probability of an up movement? Consider an American futures call option where the futures contract and the option contract expire at the same time. Today’s most active Indices options – call options and put options with the highest daily volume. A binary option based on a stock index future is a contract used for speculating on a particular stock index, such as the futures derivative of the S&P 500 or the NASDAQ 100. maturity. A portfolio is currently worth $10 million and has a beta of 1.0. A binomial tree with one-month time steps is used to value an index option. 11) A portfolio manager in charge of a portfolio worth$10 million is concerned price of 0.8, C) What is the value of the option? What is the size of one option contract on the S&P 500? the portfolio has a beta of 0.5? movement? What is the difference between the two? The A stock option is a contract between two parties in which the stock option buyer (holder) purchases the right (but not the obligation) to buy/sell 100 shares of an underlying stock at a predetermined price from/to the option seller (writer) within a fixed period of time. The futures or options contract's value is based on the movements of the index it tracks. The S&P 100 Index (OEX and XEO) The S&P 500 Index (SPX) The Dow Jones Index times 0.01 (DJX) The Nasdaq 100 Index (NDX) Contracts are on 100 times index; they are settled in cash; OEX is … What is the put-call parity relationship for European currency options? In Section 11.4 it is noted that a futures price is analogous to a security paying a continuous dividend yield at rate $r .$ By considering a forward contract on the futures price and using results from Chapter 3 , show that the forward price equals the futures price when interest rates are constant. The main difficulty for traders pricing index options is the dividend estimate. interest rate is 3% per annum and the dividend yield is 1% per annum. ), If the price of currency A expressed in terms of the price of currency B follows the process assumed in Section $11.3,$ what is the process followed by the price of currency $\mathbf{B}$ expressed in terms of currency $\mathbf{A} ?$. What should the continuous dividend yield be replaced by when options on an Which of the following is NOT true about a range forward contract? Describe the salary of a fund manager as a derivative security. 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