Abstract

Options on futures traded in Europe, Australia and South Africa are subject to futures-style premium posting (FSPP): the premium is not paid up front but marked to market, and the last settlement premium paid upon exercise. The previous literature has derived pricing models for such options. Only after that derivation, and using the resulting model or its assumptions, has it deducted pricing constraints like a put-call parity or the positivity of time value. Following Merton (1973), we do the reverse. First, we show the full generality of all properties found by Lieu (1990) and many other rational option-pricing constraints. In the second part of the article, we derive a binomial model not found in the literature, and give another derivation of Lieu (1990)’s model. In these derivations, we emphasize, first, the possibility of pricing an option by replicating its mark-to-market cash flows (MTM CF) rather than a final payoff and, second, the irrelevance of the interest rate process, which holds even though futures-style options generate a continuous stream of MTM CF. The irrelevance of interest rates is also true for rational option-pricing constraints.

Full Text
Paper version not known

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call

Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.