Pricing

Fair value of futures (cost of carry, basis, cash-and-carry), option premium anatomy, Greeks, Black–Scholes vs binomial, put-call parity, corporate actions, forecasting, and tax.

1. 4.1–4.2

   Futures fair value

   • F ≈ S × e^(rT) (financials) or S + storage/insurance − convenience, financed at r (commodities).
   • If futures > fair value: buy spot, sell futures (cash-and-carry).
   • If futures < fair value: sell/short spot, buy futures (reverse cash-and-carry).
   • Interest-rate parity: F = S × (1 + r_base) / (1 + r_quote) with consistent quoting.
   • CAD/USD example: S = 1.35, r_CAD 3%, r_USD 5% → F ≈ 1.35 × 1.03 / 1.05 ≈ 1.32.

2. 4.3–4.6

   Option value

   • Premium = intrinsic + time value. Intrinsic of a call = max(S − K, 0).
   • OTM options have zero intrinsic; the whole premium is time value.
   • ATM options carry relatively high time value because they offer the most leverage to a move either way.
   • Time value → 0 at expiry.

3. 4.4–4.5

   Greeks and models

   • Delta, gamma, theta, vega, rho.
   • Black–Scholes: continuous trading, constant volatility, typically no dividends in the basic form.
   • Binomial: can price early exercise, vesting cliffs, and American features at each node.
   • Path-dependent barriers: Monte Carlo.

4. 4.7

   Corporate actions

   • Ordinary cash dividends: listed equity options are not adjusted.
   • n-for-1 split: strike ÷ n, multiplier × n.
   • 1-for-2 reverse split: strike × 2, multiplier 50 shares.

5. 4.8

   Put-call parity

   • C − P = S − PV(K) (European, no dividend).
   • If C is rich vs P: sell call, buy put, buy (or hold) the underlying — or the matching synthetic.
   • If P is rich: buy call, sell put, short stock, lend PV(K).

6. 4.9–4.10

   Forecasting and tax

   • Fundamental: financials, inventories, OPEC quotas, EIA storage.
   • Technical: charts, RSI, moving averages, Fibonacci.
   • Non-professional covered-call premium: generally a capital gain, 50% taxable, reported at expiry/close.