OTC options

I'd have to think about it.

By default I'd say that if the interest rate and dividend yield of the underlier is zero, then the risk-free fair price of both the regular and the capped future contracts is precisely $50. As a market maker you add some margin.

But I'll have to think about the fundamentals and *why* the arbitrage-free price is spot * exp((interest - dividend) * time) and check if it still holds for the capped futures. Could make a published article for my currently running math PhD!
 
That's because regular assumptions about arbitraging a future do no longer hold for capped ones. Let's take the case where interest rate is zero and dividends are zero.

Say you sell the future at $51. Under regular futures you'd borrow $5000 from the bank and buy the underlier.
Then you've locked a $100 profit no matter what.

If the stock drops to $1, you still sell it at $5000, as the contract stipulates.
But in the capped future case, you only get $1000 for it, and you're left with a $4000 loss from the value of the asset.
Tough luck, you gotta think different!

Not that it's not doable, it's just a different game.
 
That's why I'm not bothering with futures and just using CFDs. You don't need to price those, they are already priced by the market, at the spot price of the underlier.

Options, on the other hand, are entirely priceable under the same regular arbitrage-free assumptions, using the capped CFDs. It's a breeze to do that, I can publish the formula in two minutes.

So pricing of instruments is (will be) well known and understood, a Black-Scholes like formula.
 
Well, you could also use the options mkt, innit?

A "capped/floored" futures contract should be priced as a regular contract, but also incorporate the values of the cap and the floor. Obviously, when I am the buyer, I will be long the floor and short the cap; vice versa when I am the seller.
 
And if you have capped CFDs, using those as the arbitrage instrument instead of the real stock, then you can also price futures, for which the formula becomes again, exactly the same as for regular exchange-traded, uncapped ones.
 
I dunno anything about capped CFDs.

As long as you're happy with the idea that the prices of the "capped/floored" futures contracts could be different to the vanilla, I am happy to make you a mkt.
 
>> As long as you're happy with the idea that the prices of the "capped/floored" futures contracts could be different to the vanilla, I am happy to make you a mkt.

Yup, I don't care much for the future price (and spread) as long as it's within reason. I get my profits from trading options and figuring out the right volatility so a little spread (and profit for the futures guy) is not bothering me.

So you say you'd be willing to be a counterpart for such contracts. Now we must find a broker or some OTC exchange, like mail or something :)
 
Also I need counterparts for my OTC options or there wouldn't be a ground for me to trade those OTC futures (which I use for hedging those options).
 
Reality of it is aquarians, thats not going to happen.

If ur that concerned then buy a very deep OTM option, it'l be that cheap you'l pretty much be getting what you are asking.
 
CBC said:
Reality of it is aquarians, thats not going to happen.

If ur that concerned then buy a very deep OTM option, it'l be that cheap you'l pretty much be getting what you are asking.
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He wants a contract where that embedded option is free. Essentially he wants an arbitrage opportunity.
 
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