Index futures and options in the Athens derivatives exchange: An evaluation of pricing rationality

Abstract

This project deals with derivatives in Athens Derivative Exchange and in particular with futures and options on FTSE/ASE20 and mid-40 indices. In the first part of the project, Greek derivatives market is described and a brief historical flashback is stated. Afterwards, features concerning the available products are presented, along with details on future and option contracts in general, accompanied by description of the process in use for the purposes of the project. Finally, calculations methods and models utilized for the analysis are briefly described. The second part of the project deals in particular with the index futures traded in the ADEX. Data collection and calculation procedures are stated first, followed by the results of the computations. Next, there is a commentary on the findings, which can be condensed to the following: Pricing of FTSE/ASE 20 futures is quite rational and the market can, generally characterized moderately efficient. Futures prices reflect underlying asset prices in an effective way and arbitrage opportunities are limited. Though, the fact that prices are normally in fair levels, is its self and indicator that arbitrage takes place in this market, restraining prices from deviating from theoretical values. Future contracts though on FTSE/ASE mid-40, are appeared to be rather irrationally priced, since market prices deviate significantly from fair values. Lack of liquidity in the market allows prices to fluctuate in an imbalanced manner, moreover the complexity of the construction of the underlying asset comprises a major obstruction for the application of arbitrage strategies. Arbitrage strategies on futures are presented afterwards, but from a rather theoretical point of view, since a factor of major importance for successful arbitrage is timing and objective difficulties in data collection and analysis were forbidding for capturing this aspect is the study. In the next part, three significant option pricing models (Black-Scholes Model, CRR Binomial Tree and Monte Carlo Simulation) are presented. Theoretical features are analyzed, assumptions upon which they are constructed are mentioned and the option evaluation procedures are analyzed. Afterwards, index option prices are stated in question. Computational procedures are thoroughly described as well and results are presented. Option on FTSE/ASE 20 market can be characterized as quite efficient, since liquidity is sufficient and prices are generally fair. Similarly, to futures, option on FTSE/ASE mid 40 appear less efficiently priced and the market is characterized my limited liquidity and pricing disharmonies. Again, complexity of the underlying asset is a factor that limits the arbitrage opportunities.