Synthetic Forward using Options
In the previous video on his series on "Derivatives Unlocked", Lindsey explained us the valuation relationship – relating together calls and puts at the same strike and showing that we only need to think about valuation and risk of the out of the money option. In this video we can see the same effects by looking at breakeven graphs.
Overview
Valuation of options is based on the price of the underlying, not the strike. Value of an option can be deduced from the value of its out-of-the-money option. The key relationship between options is something we used to use all day every day on the trading floor. It is a key relationship which junior traders were taught all day, every day. It can be used by investors to help them in valuation, risk management and pricing. It will require some kind of option pricing model, but there are some key parts that do not require it.
Key learning objectives:
How are Options Valued?
What is Long Protection?
Summary
Expert
Lindsey Matthews
Lindsey runs Perfordiant, an investment risk and performance consulting firm. He has worked in financial markets since 1992. Lindsey became an MD in fixed income and equities, ran a Risk function, and was on the management team of an Asset Management fintech business. Lindsey is now a Visiting Fellow at the Henley Business School, and resides on the board of CFA UK.
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