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Options of futures: Pricing and the effect of an anticipated price change

โœ Scribed by Avner Wolf

Publisher
John Wiley and Sons
Year
1984
Tongue
English
Weight
938 KB
Volume
4
Category
Article
ISSN
0270-7314

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โœฆ Synopsis

Pricing and the Effect of an

Anticipated Price Change

Avner Wolf is article commodity examines theoretical aspects of Black's (1976) pricing formula of r options and the effect on the option's premium of an anticipated future drift in the futures price. In the first part, we derive the formula in a manner which makes its financial interpretation easy to understand. Then, using comparative statistics, the sensitivity of the formula with respect to its variables is examined. Computer simulations and diagrams are used to demonstrate the sensitivity analysis of the formula. In the second part, we discuss the effect of an anticipated change in the underlying commodity price on options premiums. Using Cox-Ross (1975) transformation, we show that as long as all the information is incorporated in the prices relevant to the pricing formula, a drift in the commodity price will not affect the premium of a European option.

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