FIN 401 Lecture Notes - Lecture 9: Cash Flow, Option Style, Valuation Of Options
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18 Apr 2016
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Chapter 9: principles of pricing forwards, futures, and options on futures. 5. (forward/futures pricing revisited) the futures price will not be the expected spot price in september because the dominance of the long hedgers will induce a risk premium. Thus, the futures price of . 76 is biased low. Without information on the magnitude of the risk premium, it is impossible to come up with a precise estimate. The expected spot price in september, however, is no less than . 76. They will always sell for at least the lower bound, which is higher than the intrinsic value, and usually more. Call options on the futures, however, might be exercised early. If the price of the underlying instrument is extremely high, the call will begin to behave like the underlying instrument. For an option on a futures, this means that the call will behave like the futures, changing almost dollar-for-dollar with the futures price.
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