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dc.contributor.authorChaput, J Scotten_NZ
dc.contributor.authorEderington, Louis Hen_NZ
dc.date.available2011-04-07T03:18:54Z
dc.date.copyright2005-08-19en_NZ
dc.identifier.citationChaput, J. S., & Ederington, L. H. (2005, August 19). Ratio spreads. University of Otago Department of Finance Seminar Series.en
dc.identifier.urihttp://hdl.handle.net/10523/1509
dc.description.abstractRatio spreads in which one buys X calls (or puts) at one strike and sells Y calls (puts) at a different strike where YX are among the most actively traded option combinations yet are only briefly mentioned in most derivatives texts and have received no attention in the research literature. Moreover when ratio spreads are discussed in texts or the practitioner literature the proposed uses vary widely. There is no agreement on when these spreads should be used, no guidance on how they should be designed, and no data on how they are used and designed. Based on data on ratio spread trades from the Eurodollar options market, we examine the design of ratio spreads and explore what the chosen designs reveal about the motives of the traders. We find that most ratio spreads are designed so that the net price is positive but small and most have small deltas. The data is mixed on whether ratio spreads are used as volatility spreads. Their gammas and vegas have the hypothesized signs but are generally quite low. Frontspread designs in which profits are bounded and losses unbounded considerably exceed backspread designs in which losses are bounded and profits unbounded.en_NZ
dc.format.mimetypeapplication/pdf
dc.relation.ispartofUniversity of Otago Department of Finance Seminar Seriesen_NZ
dc.relation.urihttp://www.business.otago.ac.nz/finc/research/seminars_05.htmlen_NZ
dc.subjectRatio spreadsen_NZ
dc.subjecttraded option combinationsen_NZ
dc.subjectEurodollar options market,en_NZ
dc.subject.lcshHF Commerceen_NZ
dc.subject.lcshHF5601 Accountingen_NZ
dc.subject.lcshHG Financeen_NZ
dc.titleRatio spreadsen_NZ
dc.typeConference or Workshop Item (Seminar, Speech or Other Presentation)en_NZ
dc.description.versionUnpublisheden_NZ
otago.bitstream.pages43en_NZ
otago.date.accession2007-04-13en_NZ
otago.schoolFinanceen_NZ
otago.openaccessOpen
otago.place.publicationDunedin, New Zealanden_NZ
dc.identifier.eprints631en_NZ
dc.description.refereedNon Peer Revieweden_NZ
otago.school.eprintsFinance & Quantitative Analysisen_NZ
dc.description.referencesBarone-Adesi, G. and R. Whaley. “Efficient analytic approximation to american options values.” Journal of Finance, 42 (1987), 301-320. Black, F. ‘The pricing of commodity contracts. ‘ Journal of Financial Economics, 3(1976), 176-179. Chance, D. Derivatives and Risk Management, 5th Edition (2001), Southwestern. Chaput, J. S. and L. Ederington. “Option spread and combination trading.” Journal of Derivatives, 10 (2003), 70-88. Chaput, J. S. and L. Ederington. “Volatility spread design.” Journal of Futures Markets, vol 25, #3 (March 2005a), pp 243-279. Chaput, J. S. and L. Ederington. “Vertical Spread Design,” Journal of Derivatives, vol12, #3 (Spring 2005b), pp 28-46. Hull, J. Options, Futures, and Other Derivative Securities, 5th Edition (2003), Englewood Cliffs, Prentice Hall. Kolb, R. Futures, Options, and Swaps, 4th edition (2003), Cambridge, Blackwell. McDonald, R. L. 2003. Derivatives Markets, Addison Wesley. McMillan, L. G. 1980. Options as a Strategic Investment, (1980) New York, New York Institute of Finance. McMillan, L. G. 1996. McMillan on Options, (1996) New York, John Wiley & Sons. Natenberg, S. Option Volatility and Pricing: Advanced Trading Strategies and Techniques, Second Edition (1994), Chicago, Probus.en_NZ
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