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Continuing on the example above, suppose now that the initial price of Alice's house is $100,000 and that Bob enters into a forward contract to buy the house one year from today. But since Alice knows that she can immediately sell for $100,000 and place the proceeds in the bank, she wants to be compensated for the delayed sale.
Regarding the argument of Carr and Lee (2009), [3] in the case of the continuous- sampling realized volatility if we assumes that the contract begins at time =, () is deterministic and () is arbitrary (deterministic or a stochastic process) but independent of the price's movement i.e. there is no correlation between () and , and denotes by ...
A delta one product is a derivative with a linear, symmetric payoff profile. That is, a derivative that is not an option or a product with embedded options. Examples of delta one products are Exchange-traded funds, equity swaps, custom baskets, linear certificates, futures, forwards, exchange-traded notes, trackers, and Forward rate agreements.
By comparison the underlying index for a cap is frequently a LIBOR rate, or a national interest rate. [1] The extent of the cap is known as its notional profile and can change over the lifetime of a cap, for example, to reflect amounts borrowed under an amortizing loan. [1] The purchase price of a cap is a one-off cost and is known as the ...
Continuing the example from the composite option, the payoff of an IBM quanto call option would then be ((),), where is the exchange rate fixed at the outset of the trade. This would be useful for traders in Japan who wish to be exposed to IBM stock price without exposure to JPY/USD exchange rate.
A cliquet option or ratchet option is an exotic option consisting of a series of consecutive forward start options. [1] The first is active immediately. The second becomes active when the first expires, etc. Each option is struck at-the-money when it becomes active. [2]
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The payoff of the call option on the futures contract is (, ()). We can consider this an exchange (Margrabe) option by considering the first asset to be e − r ( T − t ) F ( t ) {\displaystyle e^{-r(T-t)}F(t)} and the second asset to be K {\displaystyle K} riskless bonds paying off $1 at time T {\displaystyle T} .