Options can be bought from specialized options market makers. The same option may be priced differently...
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Options can be bought from specialized options market makers. The same option may be priced differently by different market makers, simply because market makers have different opinions on future market trends. You may also have different market views. From class, you learned that one of the most popular futures options is the corn futures options (typically just called "corn options"). So you thought you might try trading a few of these. You contact two market makers (MM) for quotes on corn call options for delivery in 3 months at strike $6.25 per bushel. MM1 quotes $0.11 and MM2 quotes $0.18. Suppose the corn futures price for delivery in 3 months is $6.10, and the risk-free rate is 1% p.a., continuously compounded. Based on your own market view and calculations, your estimate of volatility for the next 3 months is 20%. a) Do you agree with the price of MM1 or the price of MM2? Why and show calculation. (7 marks) b) Compared to the market maker you disagree with, could you say anything about the estimate of volatility it used? Specifically, is it greater or less than your estimate? (1 mark) Options can be bought from specialized options market makers. The same option may be priced differently by different market makers, simply because market makers have different opinions on future market trends. You may also have different market views. From class, you learned that one of the most popular futures options is the corn futures options (typically just called "corn options"). So you thought you might try trading a few of these. You contact two market makers (MM) for quotes on corn call options for delivery in 3 months at strike $6.25 per bushel. MM1 quotes $0.11 and MM2 quotes $0.18. Suppose the corn futures price for delivery in 3 months is $6.10, and the risk-free rate is 1% p.a., continuously compounded. Based on your own market view and calculations, your estimate of volatility for the next 3 months is 20%. a) Do you agree with the price of MM1 or the price of MM2? Why and show calculation. (7 marks) b) Compared to the market maker you disagree with, could you say anything about the estimate of volatility it used? Specifically, is it greater or less than your estimate? (1 mark)
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Corn Options Pricing Analysis a Disagreeing with a Market Maker Based on the information provided we ... View the full answer
Related Book For
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts
Posted Date:
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