FW: Index Option

-----Original Message-----
From: Dunton, Heather
Sent: Tuesday, August 21, 2001 10:08 AM
To: Salisbury, Holden
Subject: FW: Index Option

-----Original Message-----
From: Dunton, Heather
Sent: Tuesday, August 21, 2001 10:07 AM
To: Yang, Zhiyun; Lee, Norman; Luu, Duong; Gupta, Sanjay; Crooks, William; Kroumov, Kroum
Cc: Postlethwaite, John; Chang, Fran; Law, Samantha; Warner, Nicholas
Subject: Index Option

We have the approval from the business unit (Matt Motley) to implement Index Option deal type as such:

Index Option will be a physical option with a strike @ an Index.
For a BDay option expiry the analysis will work as follows:

The forward position will be valued taking the deal strip hours, these hours
will be valued against the scalars - the hours in the money compared
to the forward underlying price will be estimated as exercised. Only the hours
in the money will be evaluated. For the day of exercise the hours evaluated will
be the hours exercised in scheduling.

Daily the Option Exercise function in Enpower will create an Index Forward Leg
from the Index Option (expiry will be daily but the price will be hourly) @ a strike of the specified Index.

Liquidation:
Liquidation for the next day will be calculated using the actual exercised strip against the curve as the mid price.
The True-up will be index vs curve when the index is published.

This is how we would analyze each hour.
The sum of each hour will be the value of the option.

For each hour:
HE7 =
Strike = Forward Price (since Index is not available)
Underlying = Forward Price * scalar
Vol = Daily Vol
Rate = Libor
Time = same as daily (treated as a daily option for time)

Vo =f(u,s,v,r,t)
V = Intrinsic + Extrinsic

-----Original Message-----
From: Dunton, Heather
Sent: Thursday, August 16, 2001 10:41 AM
To: Motley, Matt
Cc: Yang, Zhiyun; Lee, Norman; Luu, Duong; Gupta, Sanjay; Crooks, William; Kroumov, Kroum; Postlethwaite, John
Subject: Index Option

Matt I need written confirmation regarding the analysis of the new Deal Type "Index Option" for IT to implement.

Index Option will be a physical option with a strike @ an Index.
For a BDay option expiry the analysis will work as follows:

The forward position will be valued taking the deal strip hours, these hours
will be valued against the scalars - the hours in the money compared
to the forward underlying price will be estimated as exercised. Only the hours
in the money will be evaluated. For the day of exercise the hours evaluated will
be the hours exercised in scheduling.

Buy Call: Estimated Exercised hour will have a price above the mid
Buy Put: Estimated Exercised hour will have a price below the mid

Daily the Option Exercise function in Enpower will create an Index Forward Leg
from the Index Option (expiry will be daily but the price will be hourly) @ a strike of the specified Index.

Liquidation:
Liquidation for the next day will be calculated using the actual exercised strip against the curve as the mid price.
The True-up will be index vs curve when the index is published.