eurodollar options dilema

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deleteend

New Member
#1
#1
I am having trouble getting this. Suppose I buy a ed call for $625 (25 bps in the money) at 99.25 while libor is at .50% a price of 99.50. Lets say libor falls to .25% a cost of 99.75. this should put my call option 50 bps in the money for a gain of $625(50bps x $25= $1250-$625 cost). However because the delta of the option is less than 1 at purchase the gain is less than 25 bps but intuitively i think excercise the option at 99.25 than offset it by selling an ed future at 99.75 to lock in the entire 25 points. I should be indifferent to rather i sell the option or exercise. Should the values not be equal? What am I missing?
 
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GBPEURUSD

New Member
#2
#2
deleteend said:
I am having trouble getting this. Suppose I buy a ed call for $625 (25 bps in the money) at 99.25 while libor is at .50% a price of 99.50. Lets say libor falls to .25% a cost of 99.75. this should put my call option 50 bps in the money for a gain of $625(50bps x $25= $1250-$625 cost). However because the delta of the option is less than 1 at purchase the gain is less than 25 bps but intuitively i think excercise the option at 99.25 than offset it by selling an ed future at 99.75 to lock in the entire 25 points. I should be indifferent to rather i sell the option or exercise. Should the values not be equal? What am I missing?
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i suppose what u meant by "I should be indifferent to rather i sell the option or exercise." is whats the difference?

when you are selling the option, the PV would have time value (decay) priced in; along with the other parameters that affect the PV of the option

whilst when you are exercising, there is no more time value in the option. so it makes it a straightforward PV

(assuming its a European option)
 
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