Interest Rate Options Essay Example | Topics and Well Written Essays - 1000 words

Interest Rate Options - Essay ExampleAs the base delcares a common example of this fastening is, the Treasury bewilder Futures Option. Others are Treasury Notes Futures Options and Eurodollar Futures Options. The Treasury Bond Future Options is priced at 1/64th of 1% of the Treasury Bond face value the Eurodollar Futures Bond is mensural at 0.01 basis point value being equivalent to $25. It is to be noted here that the reside goern futures prices are indirectly proportional to the bond price increases or decrease.This report discusses that Blacks model is a mutation from the Black Scholes Model, which uses the rate of interest as the base for pricing the options. The or so important factor is that it functions on the assumptions that a key market variable will be lognormally distributed at a future time. When Blacks model is used to value the price of European interest rate options, the worth of future price of V for a contract maturing at time T, is usually narrow equal to t he forward price of V rather than its futures price. This is more theoretical than practical since in this pillow slip you will have to assume that the rates of interest also remain constant while discounting over the same period of future, which is definitely not the case. This is an option which has pre-determined selling price and time. This value is determined found on the Blacks Model assumptions, that the price is lognormal at the pre-fixed time in the future. The value of the bond option can be worked out with the following equations using the Blacks model which sets Fo equal to the forward bond price.