Option's pricing - anomaly?

CFA Level III
#1

Hello everyone :slight_smile:

I have a question with regard to the option pricing - not really a CFA I level topic but I hope someone will help me to understand the issue.

Lets assume situation below (which has actually happened in the past):

Current spot exchange-rate for TRY/EUR = 6.8. Below we have following put options and its prices:

  • 1-day PUT 8.80 (premium of 2.00 TRY for every EUR)

  • 1-month PUT 8.80 (premium of 1.87 TRY for each EUR)

  • 12-month PUT 8.80 (premium 0.80 TRY for every EUR)

My questions is - what might be the reason that options with a longer expiration date are cheaper than those of shorter maturity? (interest rates? economic forecast or macro situation?) I know it’s not a common phenomenon but it seems that it happens.

You are welcome to join the discussion :slight_smile:

Thanks,

Michael

#2

Because of the theta of the option. Which in the case of the one day option is essentially all eliminated. So, it’s going to trade pretty much at whatever intrinsic value is.

with long time to expirations there’s a lot of uncertainty about future exchange rates.

idk if I explained everything as much as I should have though.