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Keywords:options OR Options 

Report
Equity Volatility Term Premia

This paper estimates the term-structure of volatility risk premia for the stock market. Realized variance term premia are increasing in systematic risk and predict variance swap returns. Implied volatility term premia are decreasing in risk initially, but then increase at a lag, predicting VIX futures returns. By modeling the logarithm of realized variance, the paper derives a closed-form relationship between the prices of variance swaps and VIX futures. The model provides accurate pricing and highlights periods of dislocation between the index options and VIX futures markets. Term premia ...
Staff Reports , Paper 867

Journal Article
Futures options and their use by financial intermediaries

Economic Perspectives , Volume 10 , Issue Jan , Pages 18-31

Report
Option-implied probability distributions and currency excess returns

This paper describes a method of extracting the risk-neutral probability distribution of future exchange rates from option prices. In foreign exchange markets interbank option pricing conventions make possible reliable inferences about risk-neutral probability distributions with relatively little data. Moments drawn from risk-neutral exchange rate distribution are used to explore several issues related to the puzzle of excess returns in currency markets. Tests of the international capital asset pricing model using risk-neutral moments as explanatory variables indicate that option-based ...
Staff Reports , Paper 32

Working Paper
Derivatives on volatility: some simple solutions based on observables

Proposals to introduce derivatives whose payouts are explicitly linked to the volatility of an underlying asset have been around for some time. In response to these proposals, a few papers have tried to develop valuation formulae for volatility derivatives?derivatives that essentially help investors hedge the unpredictable volatility risk. This paper contributes to this nascent literature by developing closed-form/analytical formulae for prices of options and futures on volatility as well as volatility swaps. The primary contribution of this paper is that, unlike all other models, our model ...
FRB Atlanta Working Paper , Paper 2000-20

Journal Article
Evidence on the efficiency of index options markets

Index options have been one of the most successful of the many innovative financial instruments introduced over the last few decades, as their high trading volume indicates. Given their prominence, the pricing efficiency of these markets is of great importance. ; Detecting inefficient pricing, or mispricing, requires comparing a theoretically efficient price with prices of options traded in financial markets. One popular approach to deriving pricing relationships is based on a principle called no-arbitrage, which simply assumes that arbitrageurs enter the market and quickly eliminate ...
Economic Review , Volume 85 , Issue Q1 , Pages 40-51

Working Paper
Market microstructure effects on the direct measurement of the early exercise premium in exchange-listed options

The Chicago Board Options Exchange concurrently listed European-style and American-style options on the Standard and Poor?s 500 Index from April 2, 1986 through June 20, 1986. We match near-the-money American option quotes with the most nearly contemporaneous, otherwise identical, European option quote. In this unique sample, the bid-ask spread for the American options is twice as large as the bid-ask spread for the European options. We find that the differences in the size of the bid-ask spreads and non-contemporaneous observations create an errors-in-variables problem that, if ignored, ...
Working Papers , Paper 1996-013

Working Paper
Immunizing options against changes in volatility

Working Papers , Paper 90-5

Working Paper
Central bank intervention and the volatility of foreign exchange rates: evidence from the options market

This paper tests the effects of central bank intervention on the ex ante volatility of $/DM and $/Yen exchange rates. In contrast to previous research which employed GARCH estimates of conditional volatility, we estimate ex ante volatility using the implied volatilities of currency options prices. We also control for the effects of other macroeconomic announcements. We find little support for the hypothesis that central bank intervention decreased expected exchange rate volatility between 1985 and 1991. Federal Reserve intervention was generally associated with a positive change in exante ...
Research Working Paper , Paper 95-04

Working Paper
Directly measuring early exercise premiums using American and European S&P 500 index options

The Chicago Board Options Exchange concurrently listed European-style and American-style options on the Standard and Poor's 500 Index from April 2, 1986 through June 20, 1986. This unique time period allows for a direct measurement of the early-exercise premium in American-style index options. In this study, using ask quotes, we find average early exercise premiums ranging from 5.04% to 5.90% for calls, and from 7.97% to 10.86% for puts. Additionally, we are able to depict a potentially useful functional form of the early exercise premium. As in previous studies, we find some instances of ...
Working Papers , Paper 2002-016

Journal Article
An option for anticipating Fed action

Options contracts on federal funds futures, a new financial instrument introduced earlier this year, can be analyzed to gauge public expectations of future Fed actions. The real bonus is that they can detect differences of opinion when markets see more than two possible outcomes for an FOMC meeting as well as the likelihood associated with each.
Economic Commentary , Issue Sep

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