Options on Stock Indexes, Currencies, and Futures

17 Pages Posted: 14 Jun 2009

See all articles by Robert M. Conroy

Robert M. Conroy

University of Virginia - Darden School of Business

Abstract

Options on stock indexes, currencies, and futures all have something in common. In each of those cases, the holder of the option does not get the same things that the holder of the underlying asset gets. This affects the value of the option. In this note, we cover the valuation implications of this for options on stock indexes, currencies, and futures.

Excerpt

UVA-F-1433

Oct. 3, 2008

Options on Stock Indexes, Currencies, and Futures

It turns out that options on stock indexes, currencies, and futures all have something in common. In each of those cases, the holder of the option does not get the same thing that the holder of the underlying asset gets. This affects the value of the option. In this note, we will cover the valuation implications of this for options on stock indexes, currencies, and futures.

Stock Indexes

One of the main issues for valuing options on stock indexes is dividends. While an individual stock might not pay dividends, for stock indexes it would be very unusual if at least one of the stocks included in the index was not paying a dividend. As of December 2003, there were options available on over 30 stock indexes. Some of the more popular include: Dow Jones Industrial Average (DJX), NASDAQ 100 (NDX), Russell 2000 (RUT), and the S&P 500 (SPX). See Exhibit 1 for some estimates of the number of securities included in each index, the basis on which the index is calculated, the recent returns, volatilities, the percentage of dividend-paying stocks, and the average dividend yield. Note the similarities among the large cap indexes (Dow Jones and the S&P 500) and among the small cap indexes (Russell and the NASDAQ). In each case, the returns are similar as are the dividend yields. Figure 1 shows the relative seven-year performance for 1996 through 2003 for each index. Note that the NASDAQ reflects the “dot.com” bubble of the late 1990's. Figure 2 shows the time period 2000 to 2003. Without the bubble time period, the relative returns are much more similar.

Figure 1. Relative performance of major indices (12/23/1996–12/23/2003).

Figure 2. Relative performance of major indices (12/26/2000–12/23/2003).

. . .

Keywords: futures, stock index, currency, valuation

Suggested Citation

Conroy, Robert M., Options on Stock Indexes, Currencies, and Futures. Darden Case No. UVA-F-1433, Available at SSRN: https://ssrn.com/abstract=1418881

Robert M. Conroy (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/faculty/conroy.htm

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