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MAHENDRA K P ATIDAR / PGDM BIF / 091604 86684
European Options: European options are options that can be exercised only on the
expiration date. All options based on indices such as Nifty, Mini Nifty, Bank Nifty, CNX
IT traded at the NSE are European options which can be exercised by the buyer (of the
option) only on the final settlement date or the expiry date.
American options: American options are options that can be exercised on any day on or
before the expiry date. All options on individual stocks like Reliance, SBI, and Infosys
traded at the NSE are American options. They can be exercised by the buyer on any day
on or before the final settlement date or the expiry date.
Contract value is notional value of the transaction in case one contract is bought or
sold. It is the contract size multiplied but the price of the futures.
A theoretical Model for Future Pricing: While futures prices in reality are determined
by demand and supply, one can obtain a theoretical Futures price, using the following
model:
Where:
F = Futures price
S = Spot price of the underlying asset
r = Cost of financing (using continuously compounded interest rate)
T = Time till expiration in years
e = 2.71828
Factors impacting Option Price: The supply and demand of options and hence their
prices are influenced by the following factors:
The underlying price,
The strike price,
The time to expiration,
The underlying asset’s volatility, and
Risk free rate
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