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1、Chapter 28Interest-Rate Options 1Copyright 2010 Pearson Education, Inc. Publishing as Prentice HallLearning Objectivesv After reading this chapter, you will understand v the basic features of interest-rate options contracts v why over-the-counter interest-rate options are used by institutional inves
2、tors v what futures options are, their trading mechanics, and the reasons for their popularity v the differences between options and futures v the basic option positions v the factors that affect the value of an option v what the intrinsic value and time value of an option are v the relationship bet
3、ween the price of a put and a call option v the limitations of applying the BlackScholes option pricing model to options on fixed-income securities2Copyright 2010 Pearson Education, Inc. Publishing as Prentice HallLearning Objectives (continued)After reading this chapter, you will understandv how th
4、e arbitrage-free binomial model can be used to value options on fixed-income securities v how the Black model is used to value an option on an interest rate futures contract v measures to estimate the sensitivity of the option price to the factors that determine the price v what implied volatility i
5、s v how implied yield volatility is computed v how to calculate the duration of an option v how futures options can be used to hedge3Copyright 2010 Pearson Education, Inc. Publishing as Prentice HallOptions Definedv An option is a contract in which the writer of the option grants the buyer of the op
6、tion the right to purchase from or sell to the writer a designated instrument at a specified price within a specified period of time. v The writer, also referred to as the seller, grants this right to the buyer in exchange for a certain sum of money called the option price or option premium. v The p
7、rice at which the instrument may be bought or sold is called the strike or exercise price. v The date after which an option is void is called the expiration date.4Copyright 2010 Pearson Education, Inc. Publishing as Prentice HallOptions Defined (continued)v An American option may be exercised at any
8、 time up to and including the expiration date. A European option may be exercised only on the expiration date. v When an option grants the buyer the right to purchase the designated instrument from the writer or (seller), it is called a call option. v When the option buyer has the right to sell the
9、designated instrument to the writer, the option is called a put option. v The buyer of any option is said to be long the option; the writer is said to be short the option.5Copyright 2010 Pearson Education, Inc. Publishing as Prentice HallDifferences between an Option and a Futures Contractv Notice t
10、hat options differ from futures contracts, in that the buyer of an option has the right but not the obligation to perform, whereas the option seller (writer) has the obligation to perform. v In the case of a futures contract, both the buyer and the seller are obligated to perform. v In the case of a
11、 futures contract, both the buyer and the seller are obligated to perform. v Also notice that in a futures contract, the buyer does not pay the seller to accept the obligation; in the case of an option, the buyer pays the seller the option price.6Copyright 2010 Pearson Education, Inc. Publishing as
12、Prentice HallTypes of Interest-Rate Optionsv Interest-rate options can be written on cash instruments or futures. v At one time, there were several exchange-traded option contracts whose underlying instrument was a debt instrument. v These contracts are referred to as options on physicals. v The mos
13、t liquid exchange-traded option on a fixed-income security at the time of this writing is an option on Treasury bonds traded on the Chicago Board Options Exchange. v Besides options on fixed-income securities, there are over-the- counter options on the shape of the yield curve or the yield spread be
14、tween two securities (such as the spread between mortgage pass-through securities and Treasuries, or between double A corporates and Treasuries).7Copyright 2010 Pearson Education, Inc. Publishing as Prentice HallTypes of Interest-Rate Options (continued)v Exchange-Traded Futures Options An option on
15、 a futures contract, commonly referred to as a futures option, gives the buyer the right to buy from or sell to the writer a designated futures contract at a designated price at any time during the life of the option. If the futures option is a call option, the buyer has the right to purchase one de
16、signated futures contract at the exercise price. If the buyer exercises the call option, the writer (seller) acquires a corresponding short position in the futures contract. A put option on a futures contract grants the buyer the right to sell one designated futures contract to the writer at the exercise price. If the put option is exercised, the writer acquires a corresponding long position in the designated futures contract.8Copyri
