Mechanics of Futures and options Markets.pptVIP

GSBS6142 Derivatives Risk Management Mechanics of Futures and options Markets * Review Continuous Compounding Zero Rates To calculate Bond prices Bond yield Par yield Bootstrap Method To calculate Zero Rates Forward Rates * Aim of this Chapter Understand the mechanism of futures and options markets Margins Settlement Open interest Relationship between futures price and spot price * Types of Options A call is an option to buy A put is an option to sell A European option can be exercised only at the end of its life An American option can be exercised at any time * Long Call Profit from buying one European call option: option price = $5, strike price = $100. 30 20 10 0 -5 70 80 90 100 110 120 130 Profit ($) Terminal stock price ($) * Short Call Profit from writing one European call option: option price = $5, strike price = $100 -30 -20 -10 0 5 70 80 90 100 110 120 130 Profit ($) Terminal stock price ($) * Long Put Profit from buying a European put option: option price = $7, strike price = $70 30 20 10 0 -7 70 60 50 40 80 90 100 Profit ($) Terminal stock price ($) * Short Put Profit from writing a European put option: option price = $7, strike price = $70 -30 -20 -10 7 0 70 60 50 40 80 90 100 Profit ($) Terminal stock price ($) * Option Positions Long call, Long put Short call, Short put Expiration date: T Strike price : K Underlying asset price at T : S Long call option gain = max(S-K,0) Long put option gain = max(K-S,0) * Payoffs from OptionsWhat is the Option Position in Each Case? K = Strike price, ST = Price of asset at maturity Payoff Payoff ST ST K K Payoff Payoff ST ST K K * Assets UnderlyingExchange-Traded Options Stocks Foreign Currency Stock Indices SP100 option with K If S is the value of the index at time T The call contract receives (S-K)*$100 Futures * ASX Stock Options Underlying asset Equity options are available over many of the top 100 shares Exercise style American Settlement Physically settled. (Shares change hand on