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Options on the Spot and Options on Futures
Author(s) -
BRENNER MENACHEM,
COURTADON GEORGES,
SUBRAHMANYAM MARTI
Publication year - 1985
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1985.tb02384.x
Subject(s) - futures contract , interim , asset (computer security) , cash , valuation (finance) , financial economics , asian option , payment , actuarial science , economics , spot contract , business , valuation of options , finance , computer science , geography , computer security , archaeology
This paper analyzes and compares the valuation of two types of options that relate to the same asset: options on the asset itself and options on the futures on the asset. The early exercise privilege plays a central role in explaining the differences between the values of the two options. It is shown that in the case of a cash instrument that does not make interim payments, such as gold, the value of a call option on the spot is smaller than the call option on the futures contract; the opposite is true for put options. The early exercise boundaries, which characterize when it pays to exercise, are also compared and analyzed.