Chapter 17

Options on Stock Indices

and Currencies

Options, Futures, and Other Derivatives, 8th Edition,

Copyright © John C. Hull 2012 1
Index Options
The most popular underlying indices in the U.S. are
The S&P 100 Index (OEX and XEO)
The S&P 500 Index (SPX)
The Dow Jones Index times 0.01 (DJX)
The Nasdaq 100 Index (NDX)

They are settled in cash; OEX is American; the XEO

and all others are European

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European Options on Assets
Providing a Known Yield
We get the same probability distribution
for the asset price at time T in each of the
following cases:
1. The asset starts at price S0 and
provides a yield = q
2. The asset starts at price S0e–qT and
provides no income
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 European Options on Assets
Providing KnownYield
continued

We can value European options by reducing

the asset price to S0e–qT and then behaving as
though there is no income

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Properties of index options
Lower Bound for calls:
c  S 0 e  qT  Ke  rT
Lower Bound for puts
p  Ke  rT  S 0 e  qT

Put Call Parity

c  Ke  rT  p  S 0 e  qT c  Ke  rT  p  F0 e  rT
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Extension of BSM stock options
formula
c  S 0 e  qT N (d1 )  Ke  rT N (d 2 )
p  Ke  rT N ( d 2 )  S 0 e  qT N ( d1 )
ln( S 0 / K )  (r  q   2 / 2)T
where d1 
 T
ln( S 0 / K )  (r  q   2 / 2)T
d2 
 T

Options, Futures, and Other Derivatives, 8th Edition, Copyright ©

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Alternative Formulas using
index futures
c  e  rT [ F0 N (d 1 )  KN (d 2 )]
p  e  rT [ KN ( d 2 )  F0 N ( d 1 )]
ln( F0 / K )   2T / 2
d1 
 T
d 2  d1   T
where
F0  S 0 e ( r  q )T

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Currency Options
Currency options trade on NASDAQ OMX
There also exists a very active over-the-
counter (OTC) market
Currency options are used by
corporations to buy insurance when they
have an FX exposure

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The Foreign Interest Rate
We denote the foreign interest rate by rf
When a U.S. company buys one unit of the
foreign currency it has an investment of S0
dollars
The return from investing at the foreign rate
is rf S0 dollars
This shows that the foreign currency
provides a yield at rate rf

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Valuing European Currency
Options
A foreign currency is an asset that
provides a yield equal to rf
We can use the formula for an option on
a stock paying a dividend yield :
S0 = current exchange rate
q = rƒ

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John C. Hull 2012 10
Formulas for European Currency
Options (Equations 16.11 and 16.12, page 355)
rf T
c  S0e N (d1 )  Ke  rT N (d 2 )
 rT rf T
p  Ke N (d 2 )  S 0e N ( d1 )
ln(S 0 / K )  (r  r   2 / 2)T
f
where d1 
 T
ln(S 0 / K )  (r  r   2 / 2)T
f
d2 
 T
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Alternative Formulas using currency
forward
( r rf ) T
Using F0  S0 e

c  e  rT [ F0 N (d1 )  KN (d 2 )]
p  e  rT [ KN ( d 2 )  F0 N ( d1 )]
ln( F0 / K )   2T / 2
d1 
 T
d 2  d1   T

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