option pricing discrepancy for j . c . penny transaction amitava and seksan have identified the source of the discrepancy between the
option prices calculated by the credit - reserve model and the stand - alone
spreadsheet model used in deal pricing . the discrepancy can be traced to
differences in input variables of the two models and not to any algorithmic
differences .
the options being priced are a strip of options on monthly instruments . the
credit reserve simulation program calculates the time to expiration by
assuming that the option expires on first day of the contract month of the
underlying contract , which is a very reasonable assumption .
the stand - alone option pricing spreadsheet allows specification of the option
expiration date independent of the contract month of the underlying . in the
jc penney transaction , the monthly options were assumed to expire in the
middle of the contract month , when in reality the underlying monthly
contracts expire before the start of their respective contract months . the
stand - alone spreadsheet model allows such specifications and it is up to the
user to ascertain that the expiration dates entered are legal . at present ,
seksan is ascertaining that the option contracts involved are in deed monthly
options and not a strip of daily options , in which case we would require
estimates of intramonth volatilities for both the spreadsheet model and the
credit reserve model .
regards ,
rabi de
option pricing discrepancy for j . c . penny transaction
amitava and seksan have identified the source of the discrepancy between the
option prices calculated by the credit - reserve model and the stand - alone
spreadsheet model used in deal pricing . the discrepancy can be traced to
differences in input variables of the two models and not to any algorithmic
differences .
the options being priced are a strip of options on monthly instruments . the
credit reserve simulation program calculates the time to expiration by
assuming that the option expires on first day of the contract month of the
underlying contract , which is a very reasonable assumption .
the stand - alone option pricing spreadsheet allows specification of the option
expiration date independent of the contract month of the underlying . in the
jc penney transaction , the monthly options were assumed to expire in the
middle of the contract month , when in reality the underlying monthly
contracts expire before the start of their respective contract months . the
stand - alone spreadsheet model allows such specifications and it is up to the
user to ascertain that the expiration dates entered are legal . at present ,
seksan is ascertaining that the option contracts involved are in deed monthly
options and not a strip of daily options , in which case we would require
estimates of intramonth volatilities for both the spreadsheet model and the
credit reserve model .
regards ,
rabi de