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Ch17 Index and Currency Options Fall 2022

The document discusses options on stock indices and currencies. It provides details on popular underlying indices for index options in the US and properties of index options like put call parity. It also discusses valuing European currency options and alternative formulas using currency forwards.

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Nile Seth
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35 views12 pages

Ch17 Index and Currency Options Fall 2022

The document discusses options on stock indices and currencies. It provides details on popular underlying indices for index options in the US and properties of index options like put call parity. It also discusses valuing European currency options and alternative formulas using currency forwards.

Uploaded by

Nile Seth
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 12

Chapter 17

Options on Stock Indices


and Currencies

Options, Futures, and Other Derivatives, 8th Edition,


Copyright © John C. Hull 2012 1
Index Options
The most popular underlying indices in the U.S. are
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)

They are settled in cash; OEX is American; the XEO


and all others are European

Options, Futures, and Other Derivatives, 8th Edition, Copyright ©


John C. Hull 2012 2
European Options on Assets
Providing a Known Yield
We get the same probability distribution
for the asset price at time T in each of the
following cases:
1. The asset starts at price S0 and
provides a yield = q
2. The asset starts at price S0e–qT and
provides no income
Options, Futures, and Other Derivatives, 8th Edition, Copyright ©
John C. Hull 2012 3
European Options on Assets
Providing KnownYield
continued

We can value European options by reducing


the asset price to S0e–qT and then behaving as
though there is no income

Options, Futures, and Other Derivatives, 8th Edition, Copyright ©


John C. Hull 2012 4
Properties of index options
Lower Bound for calls:
c  S 0 e  qT  Ke  rT
Lower Bound for puts
p  Ke  rT  S 0 e  qT

Put Call Parity

c  Ke  rT  p  S 0 e  qT c  Ke  rT  p  F0 e  rT
Options, Futures, and Other Derivatives, 8th Edition, Copyright
© John C. Hull 2012 5
Extension of BSM stock options
formula
c  S 0 e  qT N (d1 )  Ke  rT N (d 2 )
p  Ke  rT N ( d 2 )  S 0 e  qT N ( d1 )
ln( S 0 / K )  (r  q   2 / 2)T
where d1 
 T
ln( S 0 / K )  (r  q   2 / 2)T
d2 
 T

Options, Futures, and Other Derivatives, 8th Edition, Copyright ©


John C. Hull 2012 6
Alternative Formulas using
index futures
c  e  rT [ F0 N (d 1 )  KN (d 2 )]
p  e  rT [ KN ( d 2 )  F0 N ( d 1 )]
ln( F0 / K )   2T / 2
d1 
 T
d 2  d1   T
where
F0  S 0 e ( r  q )T

Options, Futures, and Other Derivatives, 8th Edition, Copyright ©


John C. Hull 2012 7
Currency Options
Currency options trade on NASDAQ OMX
There also exists a very active over-the-
counter (OTC) market
Currency options are used by
corporations to buy insurance when they
have an FX exposure

Options, Futures, and Other Derivatives, 8th Edition, Copyright ©


John C. Hull 2012 8
The Foreign Interest Rate
We denote the foreign interest rate by rf
When a U.S. company buys one unit of the
foreign currency it has an investment of S0
dollars
The return from investing at the foreign rate
is rf S0 dollars
This shows that the foreign currency
provides a yield at rate rf

Options, Futures, and Other Derivatives, 8th Edition, Copyright ©


John C. Hull 2012 9
Valuing European Currency
Options
A foreign currency is an asset that
provides a yield equal to rf
We can use the formula for an option on
a stock paying a dividend yield :
S0 = current exchange rate
q = rƒ

Options, Futures, and Other Derivatives, 8th Edition, Copyright ©


John C. Hull 2012 10
Formulas for European Currency
Options (Equations 16.11 and 16.12, page 355)
rf T
c  S0e N (d1 )  Ke  rT N (d 2 )
 rT rf T
p  Ke N (d 2 )  S 0e N ( d1 )
ln(S 0 / K )  (r  r   2 / 2)T
f
where d1 
 T
ln(S 0 / K )  (r  r   2 / 2)T
f
d2 
 T
Options, Futures, and Other Derivatives, 8th Edition, Copyright ©
John C. Hull 2012 11
Alternative Formulas using currency
forward
( r rf ) T
Using F0  S0 e

c  e  rT [ F0 N (d1 )  KN (d 2 )]
p  e  rT [ KN ( d 2 )  F0 N ( d1 )]
ln( F0 / K )   2T / 2
d1 
 T
d 2  d1   T

Options, Futures, and Other Derivatives, 8th Edition, Copyright ©


John C. Hull 2012 12

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