Underlying futures contract

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Underlying futures contract

A futures contract that supports an option on that future, which is executed if the option is exercised .

Underlying Futures Contract

In an option on a futures contract, the futures contract. The underlying futures contract supports the option; that is, if the option is exercised, the futures contract is executed. For example, an investor may buy a call giving him/her the right to buy a pork belly if the option is exercised. In this case, the pork belly is the underlying futures contract.

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Options on futures are traded at each of the futures exchanges and are standardized just like the underlying futures contracts. Options on the physicals are nonstandardized, just like typical forward contracts.

Chapter 1 Introduction

Here, futures options means options on futures contracts, typically traded on the same exchange as the underlying futures contracts are traded, and they are usually executed and cleared following the same or similar procedures for the futures.

We denote the market price of this contract by [[pi].sup.Z[wedge]c] ([F.sub.t],t) and assume that the futures cap has the same expiration date as the underlying futures contract. We can safely assume that [[pi].sup.Z[wedge]c]([F.sub.t],t), otherwise [[pi].sup.Z[wedge]c]([F.sub.t],t) = c.

Assuming again that the futures call option has the same expiration date as the underlying futures contract, we get:

A MARKOV MODEL FOR THE PRICING OF CATASTROPHE INSURANCE FUTURES AND SPREADS

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