10 - Options on Futures, Currency Derivatives and Exotic Options

Question 1

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

Answer 1

time value

Question 2

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

Answer 2

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

Question 3

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

Answer 3

their value should be the same

fo = So (1+r) ^ T

Question 4

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

Answer 4

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

Question 5

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

Answer 5

the same termination date

Question 6

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

Answer 6

there is an opportunity for arbitrage - triangular arbitrage

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

Question 7

what are digital options? 2

Answer 7

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

Question 8

what is a chooser option?

Answer 8

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

Question 9

what are asian options?

Answer 9

average options

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

used when average is acceptable

Question 10

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

Answer 10

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

Question 11

what are barrier options?

Answer 11

terminate and activate options once prices hit a certain level