Hey Peeps Schweser- Pg278 – American and European Options on futures and forwards I agree that AO(futures) are more valuable than EO(futures) due to the MTM and early cash at hand which could be invested in RFR assets to earn some free money. The statements which I did not understand are below (verbatim from Schweser) 1. “The price movements between early exercise and option expiration will mirror those of a deep-in-the-money option.” 2. Black Model (last para) – “In fact, the price of a European Option on a future or forward contract is equal to an option on the underlying asset if the options and forwards/futures contract expire at the same time” Schweser got to compressive to save some ink money and non-intuitive sentences like these wants me to rip open the CFAI package.
As far as #1 is concerned, I have no idea what it is talking about. I need more information regarding the context. For #2…If the futures contract expires after the option on the futures, then at expiration of the option, we gain a position in the futures for some period of time. If the futures contract has the same expiration as the option on the futures, then at expiration we simultaneously excercise option (if in the money), and then are obligated to uphold our end of the futures contract which no longer has time remaining. Therefore, at expiration we essentially have an option on the underlying whose stike price is the futures price.
Very well explained Pt #2. Thanks wyantjs!
#1 probably says that delta of deep in the money options is equal to 1.