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Lecture 10 – Options on Stock Indices and Currencies
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Lecture 10 – Options on Stock Indices and Currencies

FINC3012 - Derivative Securities

9 Pages University of Sydney Partial Study Notes Year Uploaded: 2016

Lecture 10 – Options on Stock Indices and Currencies INDEX OPTIONS: • The most popular underlying indices in the U.S. are o The S&P 100 Index (OEX and XEO)
 o The S&P 500 Index (SPX)
 o The Dow Jones Index times 0.01 (DJX) 
 o The Nasdaq 100 Index • Contracts are: o on 100 times index o settled in cash o OEX is American; the XEO and all other are European Using Index Options for Portfolio Insurance: • Suppose the value of the index is S0 and the strike price is K • If a portfolio has a β of 1.0, the portfolio insurance is obtained by buying 1 put option contract on the index for each 100S0 dollars held • If the β is not 1.0, the portfolio manager buys β put options for each 100S0 
dollars held • In both cases, K is chosen to give the appropriate insurance level

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