21 lines
1.2 KiB
Plaintext
21 lines
1.2 KiB
Plaintext
CHAPTER 33
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Mathetnatical Considerations
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for Index Products
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In this chapter, we look at some riskless arbitrage techniques as they apply to index
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options. Then a summary of mathematical techniques, especially modeling, is pre
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sented.
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ARBITRAGE
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Most of the normal arbitrage strategies have been described previously. We will
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review them here, concentrating on specific techniques not described in previous
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chapters on hedging (market baskets) and index spreading.
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DISCOUNTING
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We saw that discounting in cash-based options is done with in-the-money options as
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it is with stock options. However, since the discounter cannot exactly hedge the cash
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based options, he will normally do his discounting near the close of the day so that
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there is as little time as possible between the time the option is bought and the close
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of the market. This reduces the risk that the underlying index can move too far before
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the close of trading.
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Example: OEX is trading at 673.53 7nd an arbitrageur can buy the June 690 puts for
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16. That is a discount of 0.47 since,parity is 16.47. Is this enough of a discount? That
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is, can the discounter buy this put, hold it unhedged until the close of trading, and
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