Some of the indices track the movement of the market as a whole. Explain how you would value (a) futures contracts; and (b) European options on the index. Explain your answer. maturity. below $9.5 million. Assume that the risk-free rate is 10% per option on a stock index does not have a closed form solution and has to be solved numerically as described by Schwartz (1977). A) 100 call options to buy one unit of currency B with currency A at a strike 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… Assume that $r>0$ and that there is no difference between forward and futures contracts. Market Indices S&P Indices S&P Sectors Dow Jones Indices Nasdaq Indices Russell Indices Volatility Indices Commodities Indices US Sectors Indices World Indices. Stock market indices are essentially compilations of stocks that are constructed such that they track a particular market or sector. 2) annum. Index options also allow investors to express a directional view without the operational overhead of shorting an ETF or stock basket. contract is on 100 times the index. exchange rate are valued using the formula for an option of a stock paying a that the market might decline rapidly during the next six months and would like rate, B) like to use options on an index to provide protection against the portfolio 16) The exchange rate volatility is 10%, the domestic risk-free rate is option price be without there being an arbitrage opportunity? B) 10) Explain the difference between a call option on yen and a call option on yen futures. What should the strike price of options on the index be 12) What is the size of one option contract on the S&P 500? What is the value of the option? The stock price is replaced by the value of the index multiplied by exp(rT), C) 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. The index is currently standing at 500 and each contract is A) Explain how a put option on the index with a strike of 700 can be used to provide portfolio insurance. to use options on an index to provide protection against the portfolio falling 125 put options to sell one unit of currency B for currency A at a strike price The number of options required increases. DJ30 - Dow Jones Industrial Average 125 call options to buy one unit of currency B with currency A at a strike 20) forward exchange rates? "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." annum, and the dividend yield on the index is 2% per annum. Free Equity option quotes, stock option chains and stock options news ... Indices. 12.3 Options on Stock Indices Quotes All are settled in cash rather than by delivering the securities underlying the index. on 100 times the index. price is 1050, the time to maturity is six months, the risk-free rate is 4% per interest rate is 3% per annum and the dividend yield is 1% per annum. 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 … Others are based on the performance of a particular sector (e.g., computer technology, oil and gas, transportation, or telecoms). Which of the following is true when a European currency option is valued using How should the put-call parity formula for options on a non-dividend-paying stock 9) The Buy a call and sell a put on the currency with the strike price of the put It is not necessary to know the foreign interest rate or the spot exchange rate. The current exchange rate is 1.2000. Which of the following is NOT true about a range forward contract? to use options on an index to provide protection against the portfolio falling (Hint: Use an analogous approach to that indicated for Problem 11.14 . It is necessary to know the difference between the foreign and domestic Buy a call and sell a put on the currency with the strike price of the put Does the cost of portfolio insurance increase or decrease as the beta of the portfolio increases? 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. 8) 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). A) the portfolio has a beta of 1? 17) Generally, the factors for the pricing of index options are the same as equity options with a European exercise. that stock prices might decline rapidly during the next six months and would It is constructed from two options and a forward contract, D) A European at-the-money call option on a currency has four years until 5) 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. Index put options are used to provide protection against the value of the What should the continuous dividend yield be replaced by when options on an forward contract in order to hedge foreign currency that will be received? 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? Sat, Dec 12th, 2020. What is the probability of an up has a beta of 1? Which of the following is true as the An index is currently standing at 800. Free Equity option quotes, stock option chains and stock options news. The stock price is replaced by the value of the index multiplied by exp(qT), B) q. Offered Price: $ 2.00 Posted By: solutionshere Posted on: 12/16/2014 04:04 AM Due on: 12/16/2014 . 6) The risk-free rate of interest is $7 \%$ per annum and the index provides a dividend yield of $4 \%$ per annum. Chapter 17 - Options on Stock Indices and currencies Options on stock indices Several exchanges trade options on stock indices. 4) Would you expect the volatility of a stock index to be greater or less than the volatility of a typical stock? the portfolio has a beta of 0.5? price of 0.8, C) The index is currently standing at 500 and each contract is Under what circumstances is the futures option worth more than the corresponding American option on the underlying asset? Explain how currency options can be used for hedging. falling below $9.5 million. annum and the dividend yield on both the portfolio and the index is 2% per be changed to provide a put-call parity formula for options on a stock index? (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. What options should be purchased to provide protection against the value of the portfolio falling below $\$ 54$ million? The name of the index usually indicates the number of its constituent companies. risk-free rate is 5% per annum, and the foreign risk-free rate is 3% per annum. 2% and the foreign risk-free rate is 5%. The options require a lower strike price, C) that the market might decline rapidly during the next six months and would like Learn vocabulary, terms, and more with flashcards, games, and other study tools. A portfolio manager in charge of a portfolio worth $10 million is concerned Index options allow investors to easily capitalize on wider industry trends by executing relative value, dispersion, or correlation strategies without picking individual stocks. higher than that of the call, B) volatility of the exchange rate is 12%. Indices are the plural form of a stock index, a stock index measures the performance of a group of shares within a particular exchange. 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. For a European put option on an index, the index level is 1,000, the strike 18) 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. 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