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
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: Suggested Citation