Others are based on the performance of a particular sector (e.g., computer technology, oil and gas, transportation, or telecoms). There are futures and options markets available for all of the popular stock indexes. 100 put options to sell one unit of currency B for currency A at a strike price If the fund makes a profit, the salaries will be proportional to the profit. What position is required if the portfolio has a beta Some of the indices track the movement of the market as a whole. "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." 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 … 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. $p$ is the price of a European put option, and both options have exercise price $X$ and maturity $T$. 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. strike price is 0.9100, the time to maturity is one year, the domestic How low can the option price be without there being an arbitrage opportunity? Suppose that an exchange constructs a stock index which tracks the return, including dividends, on a certain portfolio. Indices are the plural form of a stock index, a stock index measures the performance of a group of shares within a particular exchange. forward exchange rates? annum. The stock price is replaced by the value of the index multiplied by exp(qT), B) 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? 8) Calculate the value of a 3 -month European put with exercise price 350. The futures or options contract's value is based on the movements of the index it tracks. Explain your answer. Would you expect the volatility of a stock index to be greater or less than the volatility of a typical stock? has a beta of 1? DJ30 - Dow Jones Industrial Average Chapter Questions. price is 1050, the time to maturity is six months, the risk-free rate is 4% per 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). maturity. Which of the following is true as the 20) Chapter 15 Options on Stock Indices and Currencies . Which of the following is NOT true about a range forward contract? A portfolio is currently worth 10 million and has a beta of 1.0 . Buy a put and sell a call on the currency with the strike price of the put What is the size of one option contract on the S&P 500? 7) What is the put-call parity relationship for European currency options? The exchange rate volatility is 10%, the domestic risk-free rate is The risk-free rate of interest is $7 \%$ per annum and the index provides a dividend yield of $4 \%$ per annum. 125 put options to sell one unit of currency B for currency A at a strike price beta of the portfolio increases? 1Complex Options. 5) Offered Price: $ 2.00 Posted By: solutionshere Posted on: 12/16/2014 04:04 AM Due on: 12/16/2014 . higher than that of the call, B) rate, B) The exchange rate volatility is 10%, the domestic risk-free rate is ... Stock Market Ideas. that the market might decline rapidly during the next six months and would like 3) 12) 18) The foreign risk-free rate minus the domestic risk-free rate. 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. 2 Option Call Option Put Option Stock Option Index Option Key Terminologies 3. 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. If the fund loses money, the salaries will be zero. Explain how currency options can be used for hedging. The options require a lower strike price, C) (Hint: Use an analogous approach to that indicated for Problem 11.14 . forward contract in order to hedge foreign currency that will be paid? A mutual fund announces that the salaries of its fund managers will depend on the performance of the fund. A portfolio manager in charge of a portfolio worth $10 million is concerned that stock prices might decline rapidly during the next six months and would Find an index with which you are comfortable We offer Indices from the UK, US, Asia, Australasia and Europe. How should the put-call parity formula for options on a non-dividend-paying stock 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… of 0.8, D) A binomial tree with three-month time steps is used to value a currency option. The domestic and foreign risk-free rates are 4% and 6% respectively. Can an option on the deutschemark-yen exchange rate be created from two options. Which is worth more? 2. The index is currently standing at 500 and each contract is below $9.5 million. B) Which of the following describes what a company should do to create a range price of 0.8, C) one on the dollar-deutschemark exchange rate the other on the dollar-yen exchange rate? q. What is the probability of an up The stock price is replaced by the value of the index multiplied by exp(-qT), D) What options should be purchased to provide protection against the value of the portfolio falling below $\$ 54$ million? Futures and options that are based upon a stock index are known as derivatives markets because they are derived from the underlying stock index. the portfolio has a beta of 1? A call option on a stock index gives you the right to buy the index, and a put option on a stock index gives you the right to sell the index. A) Explain your answer. A portfolio manager in charge of a portfolio worth $10 million is concerned What is a stock index binary option? Calculate the value of a European call option with exercise price 0.75 and exercise date in 9 months. to use options on an index to provide protection against the portfolio falling Free Equity option quotes, stock option chains and stock options news ... Indices. 15, 16). It is not necessary to know the foreign interest rate or the spot exchange rate. higher than that of the call, D) 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. 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. 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. the risk-neutral growth rate of the exchange rate? They use indices to track the performance of the stock market. What is the value of the option? It is not necessary to know either the foreign or domestic interest rate, C) The current exchange rate is 1.2000. Learn vocabulary, terms, and more with flashcards, games, and other study tools. What should the continuous dividend yield be replaced by when options on an 2% and the foreign risk-free rate is 5%. Assume the options last T years. Trading Signals. 16) What should the strike price of options on the index be Assume the options last T years. below $9.5 million. currency B at a strike price of 1.25? Help. What is the probability of an up movement? Buy a put and sell a call on the currency with the strike price of the put 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. The most popular indices underlying options in the U.S. are. 1) 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? Start studying Options on Stock Indices, Currencies and Futures Contracts (Ch. exchange rate are valued using the formula for an option of a stock paying a What is the same as 100 call options to buy one unit of currency A with 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. For a European call option on a currency, the exchange rate is 1.0000, the below $9.5 million. Therefore, profit/loss on an index option is based on the … that the market might decline rapidly during the next six months and would like 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. 2) Under what circumstances is the futures option worth more than the corresponding American option on the underlying asset? 125 call options to buy one unit of currency B with currency A at a strike 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$. Generally, the factors for the pricing of index options are the same as equity options with a European exercise. 11) on 100 times the index. that the market might decline rapidly during the next six months and would like 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. Stock Option vs. Index Option 1. be changed to provide a put-call parity formula for options on a stock index? The index is currently standing at 500 and each 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. 13) Free Equity option quotes, stock option chains and stock options news. Options on Stock Indices, Currencies, and Futures Contracts Educators. Index put options are used to provide protection against the value of the Options, Futures, and Other Derivative Securities 2nd, Options on Stock Indices, Currencies, and Futures Contracts. 10) What is the difference between the two? currency. The main difficulty for traders pricing index options is the dividend estimate. interest rates but not the rates themselves, D) lower than that of the call. movement? The number of options required increases. The main stock indices are managed by the exchanges of developed countries. What should the strike price of options on the index be 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. 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. Simple Solutions. Assume that the risk-free rate is 10% per falling below $9.5 million. 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