Options on the One Day Interfinancial Deposits Index: Derivation of a Formula for the Calculation of the Arbitrage Free Price

FinanceLab Working Paper No. 2000-04

24 Pages Posted: 8 Nov 2001

See all articles by Pedro L. Valls Pereira

Pedro L. Valls Pereira

Sao Paulo School of Economics - FGV and CEQEF- FGV

Date Written: 2000

Abstract

This article derives a closed form formula for the arbitrage free price of the options on the One day Brazilian Interfinancial Deposits Index (IDI) using some results from modern theory of finance.

The importance of this work is twofold: one theoretical and another practical. From a theoretical point of view this option has some features that are unique and usual formulas for option pricing cannot be applied in this case. From the practical point of view the formula is easily implemented.

In order to understand the difference between this derivative and other derivatives we present the economic motivation for this contract. A continuous time statistical model for pricing the IDI option is presented and its proprieties are derived.

Keywords: Option Pricing; IDI; Martingale Theory

JEL Classification: G12, G13

Suggested Citation

Valls Pereira, Pedro L., Options on the One Day Interfinancial Deposits Index: Derivation of a Formula for the Calculation of the Arbitrage Free Price (2000). FinanceLab Working Paper No. 2000-04, Available at SSRN: https://ssrn.com/abstract=289543 or http://dx.doi.org/10.2139/ssrn.289543

Pedro L. Valls Pereira (Contact Author)

Sao Paulo School of Economics - FGV and CEQEF- FGV ( email )

Rua Itapeva 474 room 1006
São Paulo, São Paulo 01332-000
Brazil
55+11+37993726 (Phone)
55+11+37993357 (Fax)

HOME PAGE: http://sites.google.com/site/pedrovallspereira

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