# Library and book shop - Essay Example

There are two main models used in the Australian market for pricing equity options: the binomial model and the Black-Scholes model. For most traders these two models will give accurate enough results from which to work. A new class of option price models is developed and applied to options on the Australian S&P200 Index. The class of models generalizes the traditional Black-Scholes framework by accommodating time-varying conditional volatility, skewness and excess kurtosis in the underlying returns process.

An important property of the more general pricing models is that the computational requirements are essentially the same as those associated with the Black-Scholes models, with both methods being based on one-dimensional integrals. The S&P200 Index represents the ‘price’ of a market portfolio covering 200 of the largest companies trading on the Australian Stock Exchange (ASX), comprising approximately 89% of the total market capitalization of Australian stock market (as at 31 August 2000).

Options on the Australian S&P200 are European style options, expiring at 3-monthly intervals. Settlement at exercise is in cash. When pricing European currency options simple modifications of the Black-Scholes model are often used. For example, the Garman Kohlhagen model delivers the B-S equation with dividends and sets the dividend rate equal to the foreign interest rate. An alternative is to substitute the sport FX by the Future (with the same maturity of the option) in the B-S equation and ignore interest rates.

This is more appropriate because the expected devaluation (all expectations and probabilities are taken under the equivalent martingale measure) may differ from the difference in interest rates, violating the Garman Kohlhagen model. This difference is due to costs of capital flow, relevant in many countries that adopt managed FX regimes, but mainly to the extra risks (credit risk, capital control risk, political risk, fraud risk, etc. ), which are usually substantial in these countries.

All of these risks and costs are accounted for in the price of future. Hence practioneurs often use this extra information and apply B-S to expected future spot, given by the price of the future. In practice, supply and demand will often dictate at what level an option is priced in the marketplace. Traders may calculate fair value on an option to get an indication of whether the current market price is higher or lower than fair value, as part of the process of making a judgement about the market value of the option. Israel

For the infant Israeli currency options market, which has not been thoroughly investigated so far, currency options were first launched in Israel in 1987, by Bank HaMizrahi, but met with little success until 1989, when the Bank of Israel reversed its policy opposing such options. In November 1989 the Bank of Israel first launched currency options as part of its policy to encourage the financial and future instruments market. Currency options were first traded on the Tel Aviv Stock Exchange (TASE)in April 1994; over the counter (OTC) trading gained momentum only in the past year or so (1997–98).

Based on the Black and Scholes (1973) and Merton (1973) valuation formula, Biger and Hull (1983) and Garman and Kohlhagen (1983) were the first to derive a currency options pricing model. Their formula (henceforth: the B-S formula or model) is: Following HajYehia (1997), this formula is used here as a native formula for the Israeli Market. Methodology There are three research philosophies, which all have an important part to play in business and management research. Which one to choose depends on the way thinking about the development of knowledge.

Positivism, “works with an observable social reality and that the end product of such research can be law-like generalizations similar to those produced by the physical and natural scientists” (Remenyi, 1998). There will be an emphasis on a highly structured methodology to facilitate replication (Gill and Johnson, 1997) and on quantifiable observations that lend themselves to statistical analysis. Interpretivism, it claims that rich insights into this complex world are lost if such complexity is reduced entirely to a series of law-like generalizations.

And for realism, it is based on the belief that a reality exists that is independent of human thoughts and beliefs. According to the different characters of these three philosophies, I choose the positivism to do may research work. In this research, I assume the role of an objective analyst, coolly making detached interpretations about those data that have been collected in an apparently value-free manner. Most of the data collected are the quantitative data. To be useful these data need to be analysed and interpreted. And the quantitative data can be incorporated into relatively inexpensive personal-computer-based analysis software.

These range from spreadsheets such as Excel and Lotus 1-2-3 to more advanced data management and statistical analysis software packages such as Minitab, SAS, SPSS for Windows and Statiew, and the software from the website as well, such as Excel add-in, options strategy evaluation model, and on-line pricing calculators. Data Resources 1. Use computer service, hardware and software . 2. Get primary data and secondary data from internet. 3. Information and data from library and book shop.

Reference

Feuerwerker, Albert, 1958, China’s Early Industrialization, Harvard University Press.