Options on the Spot and Options on Futures
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- Author(s): MENACHEM BRENNER, GEORGES COURTADON, MARTI SUBRAHMANYAM
- Published: Apr 30, 2012
- Pages: 1303-1317
- DOI: 10.1111/j.1540-6261.1985.tb02384.x
This paper analyzes and compares the valuation of two types of options that relate to the same asset: options on the asset itself and options on the futures on the asset. The early exercise privilege plays a central role in explaining the differences between the values of the two options. It is shown that in the case of a cash instrument that does not make interim payments, such as gold, the value of a call option on the spot is smaller than the call option on the futures contract; the opposite is true for put options. The early exercise boundaries, which characterize when it pays to exercise, are also compared and analyzed.