down and out option on spot assets worth the same as on futures contract?

mensatrader

Active member
183 0
Hi

Is a European down and out option on an asset worth the same as a European down and out option on the asset's futures price for a futures contract maturing at the same time as the option (given the strike and barrier is the same for the two options)?

Many thanks
 

A Dashing Blade

Experienced member
1,373 170
As a future will not neccessarily trade at it's fair/theoretic value and may not even expire at its fair value, the answer is clearly "not neccessarily".
 

A Dashing Blade

Experienced member
1,373 170
Theoretically I'd say yes

I'd guess an assumption would have to be that the deliverable asset of the future would be the underlying eg this is NOT the case for (say) equity index futures where the deliverable is cash or on (say) bond futures where the deliverable is one of a basket of bonds

It all boils down to the fact you're using a European option ie only exercisable at expiry on two instruments that, at expiry, will be exactly the same asset with exactly the same delivery schedule (ie settlement date).
 

Shakone

Senior member
2,458 665
I may have misunderstood, so apologies in advance, but isn't it possible for the down and out option to be made worthless by hitting the barrier, for one and not the other, it is path dependent after all, and the asset price is not the same as the future price. So one can hit the barrier and be knocked out, and the other not. Therefore I don't see why they would have the same value.
 

mensatrader

Active member
183 0
Theoretically I'd say yes

I'd guess an assumption would have to be that the deliverable asset of the future would be the underlying eg this is NOT the case for (say) equity index futures where the deliverable is cash or on (say) bond futures where the deliverable is one of a basket of bonds

It all boils down to the fact you're using a European option ie only exercisable at expiry on two instruments that, at expiry, will be exactly the same asset with exactly the same delivery schedule (ie settlement date).

thanks mate
 

mensatrader

Active member
183 0
I may have misunderstood, so apologies in advance, but isn't it possible for the down and out option to be made worthless by hitting the barrier, for one and not the other, it is path dependent after all, and the asset price is not the same as the future price. So one can hit the barrier and be knocked out, and the other not. Therefore I don't see why they would have the same value.

I was also thinking about this.
 
 
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