Option valuation question

goBulls · July 20th, 2011, 9:01 pm

Hi,I have an option on forward. However option expires 1-5 days before forward expires. My forward values is taken from bloomberg. I believe that we need to discount forward to the option expiration day for option vakuation but i was told since those option are margined you do not need to discount the forward.Could anybody explain me if I am wrong why that would be? what does option are margined means? I know futures are margined.

drone · July 21st, 2011, 6:11 am

A long call and a short put gives you a futures payoff, so maybe in that sense options are margined (leveraged?). Your underlying is the forward contract itself (and quotes are available) why do you want to discount this to the option expiration day?

goBulls · July 21st, 2011, 1:00 pm

Because forward are expiring at a different date so they are priced based on that days. But option are expiring earlier so i believe we need to discount the Forward to that date.

drone · July 22nd, 2011, 11:32 am

I still don't see the connection! , where T is forward expiry and t is the current time. As you state it, let T'<T be the expiry of the option: and then you have . Now let us say you want to value the option at time t (<T'<T), the discounting you are suggesting is , doesn't help!

sandipan2011 · July 28th, 2011, 9:49 am

As per Wiki http://en.wikipedia.org/wiki/Black_76, discounting will be as per T' (forward expiry day) instead of option expiry day (T) (T' > T) because underlying is forward