10 - Options on Futures, Currency Derivatives and Exotic Options Flashcards

1
Q

if intrinsic values calculated for american options on futures are different than the actual option value, what explains this difference?

A

time value

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2
Q

if a call option on a futures contract is under priced, what should an investor do?

A

buy call and exercise immediately, sell futures or let them be markets to market to receive an arbitrage profit

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3
Q

what can be said if an option on futures and an option on spot have the same expiration?

A

their value should be the same

fo = So (1+r) ^ T

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4
Q

when should a call or put option on futures be exercised early? why?3

A

when they are deep in the money.

  • behave identically to futures
  • exercise frees up funds tied up in option (no funds re required to establish futures)
  • min value of EU futures call is less than value if it could be exercised
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5
Q

Black’s model is used to price options on futures, what does it require for it to work?

A

the same termination date

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6
Q

what happens when currency cross rate relationships do not hold? how can you tell if this opportunity arises?

A

there is an opportunity for arbitrage - triangular arbitrage

X/Y x Z/X x Y/Z = 1

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7
Q

what are digital options? 2

A
  • asset or nothing: if option in the money, receive asset otherwise nothing
  • cash or nothing: if option in the money, receive cash otherwise nothing
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8
Q

what is a chooser option?

A

from purchase until before expiry, purchaser can decide if option will be a put or a call

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9
Q

what are asian options?

A

average options

  • average price to determine payoff
  • average price to determine strike

used when average is acceptable

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10
Q

what are look back options? how many types are there?

A

look back at the lowest or highest price during the options life

four
look back call, min X price
look back put, max X price
fixed strike loopback call, max S
fixed strike loopback put min S
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11
Q

what are barrier options?

A

terminate and activate options once prices hit a certain level

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