option trading in future

Jun 28th, 2015
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A. T. Still University
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This paper derives pricing equations for European puts and calls on formgn exchange. The call and put pricing formulas are unhke the Black-Scholes equations for stock options in that there are two relevant interest rates, interest rates are stochastic, and boundary constraints differ. In ad&tion, it is shown that both American call and put options have values larger than their European counterparts.

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Option1. An option grant the buyer Right but NOT Obligation to buy (call option)to sell (put option)an underlying asset (shares, bonds, currencies, commodities)at a specific price (exercise price or strike price)on a specific date (European option) or anytime from now to the expiry date (American option)2. What is Right but NOT obligation means? Buying (Long) PositionExample 1: Long Call on eBay (European option)Option price (premium) = $5Strike (exercise) price = $100Buyer pay option premium $5 to the Writer, hedge against stock price increase!Buyer has the right to exercise the option when it is in-the-money(i.e. Stock price is > exercise price $100) But if it is out-of-money (i.e. Stock price is < exercise price)The Buyer has no obligation to exercise the option, (i.e. buy stocks @ $100)therefore the option is lapsed.The only cost to the buyer is the $5 premium paid when buying the option.The Buyer will then buy stocks directly from the market @ market price. (<$100)Payoffs Long Call positionExample 2: Long Put on eBay (European option)Option price (premium) = $5Strike (exercise) price = $100Buyer pay option premium $5 to the Writer, hedge against stock price decrease!Buyer has the right to exercise the option when it is in-the-money(i.e. Stock price is < exercise price) But if it is out-of-money (i.e. Stock price is > exercise price)The Buyer has no obligation to exer

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