Coursework Description and Objectives
An index option is a financial derivative that gives the holder the right, but not the obligation, to buy (Call) or sell (Put) a basket of stocks (e.g., S&P 100 or FTSE 100) at an agreed-upon price (strike price) on a certain future date (European), or any time up to that date (American).
Index Options on US stock indices are traded at the Chicago Board Options Exchange (CBOE, see www.cboe.com).
This coursework is an investigation of the pricing of options on the S&P 100 index.
There are European-style and American-style options on the S&P100. CBOE identifies:
European-style S&P100 options with the symbol code: XEO, and
American-style S&P100 options with the symbol code: OEX.
The full contract specifications can be found at
(You need to read Chapter 4 of Chance and Brooks (Option Pricing: The Binomial Model) prior to attempting the coursework. Links to all websites relevant to this coursework are given below.)
This is a demanding and challenging numerical coursework. You are advised to start as early as possible, and follow these steps in order:
- Read Chapter 4 of Chance and Brooks (Option Pricing: The Binomial Model).
- Read the instructions below to understand the requirements.
- Read the instructions again and extract a list of ALL the data that you need to download (from CBOE, Bloomberg and etfdb.com, see below). This data will consist of
- Prices (option premiums), exercise prices and time to maturity of European and American call and put options on the S&P100 index (from CBOE);
- the level and volatility of the S&P100 index or of NASDAQ 100 (from CBOE);
- the dividend yield on the S&P100 index (from etfdb.com); and
- interest rate data (from Bloomberg).
Note that you will need to download all this data within the same 15-minute interval, since CBOE’s website provides data with a 15-minute delay, and updates its data every 15 minutes. If you download different pieces of the data during different 15-minute intervals then the data will not match with each other.
- Prior to downloading the data logon to the relevant websites, including the CBOE, and familiariseyourself with them, the option symbols (also explained below), and with the number of ‘mouse clicks’ that you need to perform in order to download the data. This will prepare you well to act fast enough to download all the data you require within the same 15-minute interval window.
- Once the data is downloaded, you will need to do calculations based on this data and, therefore, will require extensiveuse of Excel. You will also need to repeat these calculations for different options, and hence automation of the calculations would help a lot. To automate the calculations, you are strongly advised to think carefully about the structure and organisation of your spreadsheet prior to implementation.
- Assume a 365-day year throughout.
A report of 1500 to 2000 words in length (excluding figures, tables, references and appendix) that contains a response to the questions that feature under the two STEPS below. Your report should be stand alone and contain all what you want to show the reader and all what you are going to be assessed upon.
However, and for verification purposes (including the External Examiner as well as the identification of collusion or plagiarism) you are required to show how you performed the detailed calculations by submitting your Excel spreadsheet(s). The Excel sheet is to verify that you have done the calculations, but do not use it as a compliment to your Word report. Your Word report should be stand alone and should not refer the reader to the Excel sheet for further detail.
As noted above, there will be two separate submission links on Canvas: one for the Word file of the report, and one for the Excel Sheet. Please do not submit your Word report to the link for the Excel sheets, or vice versa, and make sure you name these files as instructed.
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