The Pricing of Futures and Options Contracts on the Value Line Index

  • Author(s): T. HANAN EYTAN, GIORA HARPAZ
  • Published: Apr 30, 2012
  • Pages: 843-855
  • DOI: 10.1111/j.1540-6261.1986.tb04552.x

ABSTRACT

This paper considers the problems peculiar to the Value Line Index, because of its use of geometric averaging, as regards the pricing of options and futures on that index. The Value Line Composite Index (VLCI) is an equally weighted geometric average index of nearly 1700 stocks. The VLCI futures market has existed since 1982 while the VLCI options market was established in 1985. This paper provides valuation formulas and analyzes the economic properties of these contracts. Because of the geometric averaging in the VLCI, its contingent claims have special properties. For example, the futures price may fall short of the spot price and the value of a VLCI call option may decline when the volatility of the index is increased. VLCI futures are shown to provide a direct means for duplicating an equally weighted portfolio of the underlying stocks.

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