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Chapter 22
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John1 C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John2 C. Hull 2013
options
Lookback options
Shout options
Asian options
Options to exchange one asset for
another
Options involving several assets
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John3 C. Hull 2013
of standard options
Examples from Chapter 11: bull
spreads, bear spreads, straddles, etc
Example from Chapter 15: Range
forward contracts
Packages are often structured to have
zero cost
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John4 C. Hull 2013
Examples:
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John5 C. Hull 2013
Gap Options
Call
Put
Valued
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John6 C. Hull 2013
c S 0 N (d1 ) K 1 e N (d 2 )
p K 1 e rT N ( d 2 ) S 0 N ( d1 )
ln( S 0 / K 2 ) (r 2 / 2)T
where d 1
T
ln( S 0 / K 2 ) (r 2 / 2)T
d2
d1 T
T
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John7 C. Hull 2013
Cliquet Option
A
Call on call
Put on call
Call on put
Put on put
Very
sensitive to volatility
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John10C. Hull 2013
Option
At
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John11C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John13C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John14C. Hull 2013
Parity Relations
c = cui + cuo
c = cdi + cdo
p = pui + puo
p = pdi + pdo
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John15C. Hull 2013
Binary Options
(page 487-488)
Cash-or-nothing:
Asset-or-nothing:
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John16C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John17C. Hull 2013
T
Allows buyer to buy stock at lowest
observed price in some interval of time
Floating lookback put pays S S at time
max
T
T
Allows buyer to sell stock at highest
observed price in some interval of time
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John18C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John19C. Hull 2013
Payoff:
max(ST S, 0) + S K
Similar to lookback option but cheaper
How can a binomial tree be used to
value a shout option?
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John20C. Hull 2013
max(Save K, 0) (call), or
Average
max(Save ST , 0) (put)
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John21C. Hull 2013
max(U
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John22C. Hull 2013
Basket Options
Options
assets
Depends on correlations between asset
returns as well as correlations between
returns
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John23C. Hull 2013
Mortgage
Obligation (CMO)
Interest Only (IO)
Principal Only (PO)
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John24C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John25C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John26C. Hull 2013
for fixed
Fixed for floating
Floating for floating
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John27C. Hull 2013
Equity Swaps
Total
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John29C. Hull 2013
swaps
Cancelable swaps
Cancelable compounding swaps
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John30C. Hull 2013
Other Swaps
Indexed
principal swap
Commodity swap
Volatility swap
Bizzarre deals: for example the P&G 5/30
swap ( See Business Snapshot 22.4 on page 498)
Fundamentals of Futures and Options Markets, 8th Ed, Ch 22, Copyright John31C. Hull 2013