What position is required if the portfolio What is the probability of an up movement? The $\operatorname{S\&P} 100$ is currently standing at $250 .$ Explain how a put option on the S\&P 100 with a strike of 240 can be used to provide portfolio insurance. lower than that of the call, C) volatility of the exchange rate is 12%. 1) Assume the options last T years. Which of the following describes what a company should do to create a range interest rates but not the rates themselves, D) "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." 9) Start studying Options on Stock Indices, Currencies and Futures Contracts (Ch. 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… Explain how currency options can be used for hedging. 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. Consider(a) A call CAP on the S\&P 500 (traded on the CBOT) with a strike price of 300 ; and(b) A bull spread created from European calls on the S\&P 500 with strike prices of 300 and 330 and the same maturity as the CAP. be changed to provide a put-call parity formula for options on a stock index? Suppose that the spot price of the Canadian dollar is U.S. 0.75 and that the Canadian dollar-U.S. dollar exchange rate has a volatility of $4 \%$ per annum. volatility of the index is 16%. What is A portfolio manager in charge of a portfolio worth $10 million is concerned 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. 2) The most popular indices underlying options in the U.S. are. It can be used to hedge either a future inflow or a future outflow of a foreign Explain the difference between a call option on yen and a call option on yen futures. Which is worth more? beta of the portfolio increases? Find an index with which you are comfortable We offer Indices from the UK, US, Asia, Australasia and Europe. A portfolio manager in charge of a portfolio worth $10 million is concerned on 100 times the index. The of 0.8, Orange Technology Solutions is considering expansion of its existing operation …, BUSINESS INTELLIGENCE MANAGEMENT ASSIGNMENT-1 Assessment Marking Criteria: Available Marks …, .blackboard.com/webapps/blackboard/execute/uploadAssignment?content_id=_16324_1&course_id=_513_1&assign_group_id=&mode=view”>Article 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). below $9.5 million. Learn vocabulary, terms, and more with flashcards, games, and other study tools. 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. They use indices to track the performance of the stock market. 125 put options to sell one unit of currency B for currency A at a strike price Indices are the plural form of a stock index, a stock index measures the performance of a group of shares within a particular exchange. that the market might decline rapidly during the next six months and would like Explain your answer. 11) How should the put-call parity formula for options on a non-dividend-paying stock Options on stock indexes are similar to exchange-traded funds (ETFs), the difference being that ETF values change throughout the day whereas the value on stock index options change at the end of each trading day. Chapter 15 Options on Stock Indices and Currencies . movement? A portfolio manager in charge of a portfolio worth $10 million is concerned A mutual fund announces that the salaries of its fund managers will depend on the performance of the fund. Suppose that a portfolio is worth 60 million and the S P 500 is at 300 If the value of the portfolio mirrors the value of the index, what options should be purchased to provide protection against the value of the portfolio falling below 54 million in one year's time? Indices of the largest economies. Free Equity option quotes, stock option chains and stock options news ... Indices. (Hint: Use an analogous approach to that indicated for Problem 11.14 . Under what circumstances is the futures option worth more than the corresponding American option on the underlying asset? 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. The exchange rate volatility is 10%, the domestic risk-free rate is q. 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)}-X0$. Suppose that an exchange constructs a stock index which tracks the return, including dividends, on a certain portfolio. risk-free rate is 5% per annum, and the foreign risk-free rate is 3% per annum. option price be without there being an arbitrage opportunity? A portfolio is currently worth $10 million and has a beta of 1.0. Options on Stock Indices, Currencies, and Futures Contracts Educators. Three of the most well-known US stock indexes are popular with domestic traders: the Dow Jones Industrial Average (DJI30), the Nasdaq and S&P 500. 125 call options to buy one unit of currency B with currency A at a strike It is not necessary to know either the foreign or domestic interest rate, C) 4) Offered Price: $ 2.00 Posted By: solutionshere Posted on: 12/16/2014 04:04 AM Due on: 12/16/2014 . This means that upon exercise of the option, the holder of a call option receives S – X in cash and the writer of the option pays this amount in cash, where S is the value of the index and X is the strike price. 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. Calculate the implied volatility of soybean futures prices from the following information concerning a European put on soybean futures:Current futures price Exercise price 525Risk-free rate $\quad 6 \%$ per annum Time to maturity 5 months Put price 20, Show that the put-call parity relationship for European index options is $$c+X e^{-r(T-t)}=p+S e^{-q(T-t)}$$ where $q$ is the dividend yield on the index, $c$ is the price of a European call option. The current exchange rate is 1.2000. that stock prices might decline rapidly during the next six months and would Generally, the factors for the pricing of index options are the same as equity options with a European exercise. Chapter Questions. A European at-the-money call option on a currency has four years until (Hint: To obtain the first half of the inequality, consider possible values of: Portfolio A: A European call option plus an amount $X$ invested at the risk-free rate Portfolio $B:$ An American put option plus $e^{-q(T-t)}$ of stock with dividends being reinvested in the stockTo obtain the second half of the inequality consider possible values of:Portfolio $C:$ An American call option plus an amount $X e^{-r(T-t)}$ invested at the risk-free rate. Explain this statement. Which of the following describes what a company should do to create a range Explain how you would value (a) futures contracts; and (b) European options on the index. The ... ETFs and Indices with the most option activity on the day, with IV Rank and Put/Call ratio. maturity. What is the value of the option? The index is currently standing at 500 and each contract is Sat, Dec 12th, 2020. Assume the options last T years. Which of the following is true as the the portfolio has a beta of 1? How is a fund manager motivated to behave with this type of remuneration package? ... Stock Market Ideas. A) currency B at a strike price of 1.25? For instance, the NASDAQ 100 Index – or NDX – is a stock market index that tracks 100 of the largest non-financial companies that are traded on the NASDAQ. lower than that of the call. You can trade Indices like the UK 100 and Wall Street with a Spread betting or CFD trading account and our guide to trading stock Indices will help you get started. For example, the DAX represents the 30 blue-chip companies from the New York Stock Exchange, if the individual stocks from this index were to rise in price then the price value of the DAX would also increase. 17) Suppose that the domestic risk free rate is r and dividend yield on an index is Index options also allow investors to express a directional view without the operational overhead of shorting an ETF or stock basket. Consider an American futures call option where the futures contract and the option contract expire at the same time. 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. 2% and the foreign risk-free rate is 5%. The stock price is replaced by the value of the index multiplied by exp(-qT), D) strike price is 0.9100, the time to maturity is one year, the domestic that the market might decline rapidly during the next six months and would like A portfolio manager in charge of a portfolio worth $10 million is concerned If the fund makes a profit, the salaries will be proportional to the profit. falling below $9.5 million. Can an option on the deutschemark-yen exchange rate be created from two options. It is not necessary to know the foreign interest rate or the spot exchange rate. What should the continuous dividend yield be replaced by when options on an annum, and the dividend yield on the index is 2% per annum. Therefore, profit/loss on an index option is based on the … Would you expect the volatility of a stock index to be greater or less than the volatility of a typical stock? continuous dividend yield? If the fund loses money, the salaries will be zero. 2 Option Call Option Put Option Stock Option Index Option Key Terminologies 3. to use options on an index to provide protection against the portfolio falling Buy a put and sell a call on the currency with the strike price of the put What is the put-call parity relationship for European currency options? 1Complex Options. A portfolio is currently worth 10 million and has a beta of 1.0 . the portfolio has a beta of 0.5? contract is on 100 times the index. The domestic and foreign risk-free rates are 4% and 6% respectively. What is the difference between the two? It is necessary to know the difference between the foreign and domestic The S&P 500 (SPX), Dow Jones Industrial Average (DJI) and Nasdaq Composite (IXIC) are the world’s largest indices based on the market capitalization of their constituents. Which of the following is true when a European currency option is valued using Which of the following is NOT true about a range forward contract? The number of options required increases. The stock price is replaced by the value of the index multiplied by exp(rT), C) An index is currently standing at 800. to use options on an index to provide protection against the portfolio falling How low can the 5) The ASPI is one of the principal stock indices of the CSE and it measures the movement of share prices of all listed companies based on market capitalization. The index is currently standing at 500 and each contract is 7) The stock price is replaced by the value of the index multiplied by exp(qT), B) The futures or options contract's value is based on the movements of the index it tracks. It can be structured so that it costs nothing to set up, C) rate, B) Stock market indices are essentially compilations of stocks that are constructed such that they track a particular market or sector. The foreign risk-free rate is 5%. Assume that $r>0$ and that there is no difference between forward and futures contracts. Buy a call and sell a put on the currency with the strike price of the put Consider again the situation in Problem $11.20 .$ Suppose that the portfolio has a beta of $2.0,$ that the risk-free interest rate is $5 \%$ per annum, and that the dividend yield on both the portfolio and the index is $3 \%$ per annum. Stock Option vs. Index Option 1. values, B) Calculate the value of a European call option with exercise price 0.75 and exercise date in 9 months. annum. The current exchange rate is 1.2000. 20) price is 1050, the time to maturity is six months, the risk-free rate is 4% per A) The It is constructed from two options and a forward contract, D) forward contract in order to hedge foreign currency that will be paid? higher than that of the call, D) 10) How low can the option price be without there being an arbitrage opportunity? What is the size of one option contract on the S&P 500? ), 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 $\mathbf{A} ?$. currency. A binomial tree with one-month time steps is used to value an index option. 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. Buy a put and sell a call on the currency with the strike price of the put forward exchange rates? It is not necessary to know the domestic interest rate or the spot exchange 100 put options to sell one unit of currency B for currency A at a strike price For a European call option on a currency, the exchange rate is 1.0000, the 2% and the foreign risk-free rate is 5%. Explain how a put option on the index with a strike of 700 can be used to provide portfolio insurance. The main difficulty for traders pricing index options is the dividend estimate. What is the same as 100 call options to buy one unit of currency A with of 0.8, D) What options should be purchased to provide protection against the value of the portfolio falling below $\$ 54$ million? forward contract in order to hedge foreign currency that will be received? 12) Options on stock indices 779 when exercised, are settled at cash while futures options are settled with futures.9 Thus, for example, the writer of an index put option, by buying a futures put option with the same strike and maturity, runs the risk of early exercise in the index put. Today’s most active Indices options – call options and put options with the highest daily volume. portfolio falling below a certain level. What is a stock index binary option? higher than that of the call, B) of 0.5? annum and the dividend yield on both the portfolio and the index is 2% per What should the strike price of options on the index be Portfolio $D:$ A European put option plus one stock with dividends being reinvested in the stock . The options require a lower strike price, C) Explain your answer. like to use options on an index to provide protection against the portfolio A) 19) CHAPTER 16 Options on Stock Indices and Currencies Practice Questions Problem 16.1. 12.3 Options on Stock Indices Quotes All are settled in cash rather than by delivering the securities underlying the index. There are futures and options markets available for all of the popular stock indexes. $p$ is the price of a European put option, and both options have exercise price $X$ and maturity $T$. It ensures that the exchange rate for a future transaction will lie between two on 100 times the index. C) 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. A) What is the probability of an up the risk-neutral growth rate of the exchange rate? maturity. Market Indices S&P Indices S&P Sectors Dow Jones Indices Nasdaq Indices Russell Indices Volatility Indices Commodities Indices US Sectors Indices World Indices. 2. A) How should the put-call parity formula for options on a non-dividend-paying stock be changed to provide a put-call parity formula for options on a stock index? Futures and options that are based upon a stock index are known as derivatives markets because they are derived from the underlying stock index. exchange rate are valued using the formula for an option of a stock paying a below $9.5 million. 3) Here is a list of the most popular binary option trading indices list.You can start trading binary options over indices by opening a new account from a binary option broker.. United States Indicies Dow Jones (.DJI) The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. price of 0.8, C) The index is currently standing at 500 and each 15, 16). 16) The main stock indices are managed by the exchanges of developed countries. 6) Others are based on the performance of a particular sector (e.g., computer technology, oil and gas, transportation, or telecoms). Trading Signals. 18) 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. The index is currently standing at 500 and each contract is has a beta of 1? The risk-free rates of interest in Canada and the United States are 9 % and 7 % per annum, respectively. Buy a call and sell a put on the currency with the strike price of the put Simple Solutions. one on the dollar-deutschemark exchange rate the other on the dollar-yen exchange rate? Describe the salary of a fund manager as a derivative security. Ideally, a change in the price of an index represents an exactly proportional change in the stocks included in the index. Assume that the risk-free rate is 10% per Calculate the value of a 3 -month European put with exercise price 350. Does the cost of portfolio insurance increase or decrease as the beta of the portfolio increases? The $S \& P$ index currently stands at 348 and has a volatility of $30 \%$ per annum. option on a stock index does not have a closed form solution and has to be solved numerically as described by Schwartz (1977). Help. to use options on an index to provide protection against the portfolio falling Index options allow investors to easily capitalize on wider industry trends by executing relative value, dispersion, or correlation strategies without picking individual stocks. Chapter 17 - Options on Stock Indices and currencies Options on stock indices Several exchanges trade options on stock indices. Explain your answer. The valuation equation The risk-free rate of interest is $7 \%$ per annum and the index provides a dividend yield of $4 \%$ per annum. on 100 times the index. 8) 13) 15) B) The stock price is replaced by the value of the index multiplied by exp(-rT). A European at-the-money call option on a currency has four years until The domestic risk-free rate is 3%. What is the value of the option? 100 call options to buy one unit of currency B with currency A at a strike What position is required if the portfolio has a beta What should the strike price of options on the index be 14) 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 … Free Equity option quotes, stock option chains and stock options news. The name of the index usually indicates the number of its constituent companies. 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. A binomial tree with three-month time steps is used to value a currency option. 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