Settings tab
With the Settings tab you can set the range and the step for each of the pickers. With this capability you can maintain flexibility without retyping values.
For example, the definition for the asset price can be set as a range and then steps within the range. Set these values and then go back to the Values tab and you will see that the asset price picker now reflects your new parameters.
The “Asset price”, “Strike price”, “Term”, and “Volatility” all work in exactly this way.
“Interest rate”, “Dividends”, and “Barrier” settings require further explanation.
Interest rate settings
The interest rate settings pop-up has a selector for “Nominal” or “Log”. If you have a nominal interest rate such as those quoted in markets then choose “Nominal”. However, many examples in textbooks, (e.g., Hull) assume that you have the log (i.e., continuous) interest rate. This is not always explicit, so when trying to replicate textbook results, you may find you need to change from one to the other before you get exactly the same result.
Dividend settings
For dividends the “From”, “To”, and “Step” fields are the same as the other rollers but there are further options that tell OptionsEQ how to interpret these values.
For some options (e.g., index options) we may assume that dividends are continuous. That is, dividends are paid evenly throughout the year. If you choose “Continuous”, therefore, the dividend values are interpreted by OptionsEQ as a % rate per annum but spread evenly throughout the year.
For stock options you may know the timing of dividend payments. In that case, you would choose “Discrete”. If you choose “Discrete” you will find that OptionsEQ can then interpret the dividend values as a percentage of the asset price at the assumed time of dividend payment (if you choose “Percentage”) or as a static amount in, say, US$ (if you choose “Fixed value” at the assumed time of dividend payment).
Payment dates are set in months by: (1) setting the time until the first dividend payment; and (2) the frequency thereafter. For example, a six-month option with a dividend in month 2 and 5 would have the settings 2 (for Next) and 4 (for Number p.a.). That is, the choice of 4 dividends p.a. means that OptionsEQ will assume a second dividend is paid 3 months after the first. Given this frequency, dividends will then be assumed until maturity. For example, twelve-month option with dividends in months 2, 5, 8 and 11 would have the same settings as above.
Barrier option settings
Barrier options are a topic by themselves. The settings in the Barrier pop-up, however, are quite straight-forward.
The barrier level is the level the asset has to reach before the barrier condition is triggered. You can then determine whether the condition is triggered when the asset prices exceeds the barrier (i.e., an “Up” barrier option) or when the asset price falls below the barrier (i.e., a “Down” barrier option). You can also determine whether the option is switched on (i.e., has value) or is switched off by choosing “In” or “Out”. As a result you can evaluate four categories of barrier options:
- Up and In options;
- Up and Out options;
- Down and In options; and
- Down and Out options.
Finally, OptionsEQ can evaluate barrier options on the assumption that either: (1) the barrier is activated if the asset price crosses the barrier at any time during the period (i.e., choose “Continuous”) or (2) the barrier is activated if the asset price as reflected in daily closing prices crosses the barrier during the period (i.e., choose “Daily”).
It should be noted that only European barrier options are currently implemented in OptionsEQ. Furthermore, in this case continuous European barrier options can be evaluated using closed-form equations while Monte-Carlo methods are required for daily-sampled European barrier options.
It should also be noted that the evaluation of daily-sampled European barrier options using Monte-Carlo methods is the only time that OptionsEQ will take a significant time to calculate the value of the options. So you may need to show some patience in these cases.
