extract.rates {RND}

Extract Risk Free Rate and Dividend Yield

Description

extract.rates extracts the risk free rate and the dividend yield from European options.

Usage

extract.rates(calls, puts, s0, k, te)

Arguments

calls

market calls (most expensive to cheapest)

puts

market puts (cheapest to most expensive)

s0

current asset value

k

strikes for the calls (smallest to largest)

te

time to expiration

Details

The extraction is based on the put-call parity of the European options. Shimko (1993) - see below - shows that the slope and intercept of the regression of the calls minus puts onto the strikes contains the risk free and the dividend rates.

Value

risk.free.rate

extracted risk free rate

dividend.yield

extracted dividend rate

Author(s)

Kam Hamidieh

References

D. Shimko (1993) Bounds of probability. Risk, 6, 33-47

Examples

#
# Create calls and puts based on BSM
#

r     = 0.05
te    = 60/365
s0    = 1000
k     = seq(from = 900, to = 1100, by = 25)
sigma = 0.25
y     = 0.01

bsm.obj = price.bsm.option(r =r, te = te, s0 = s0, k = k, sigma = sigma, y = y)

calls = bsm.obj$call
puts  = bsm.obj$put

#
# Extract rates should give the values of r and y above:
#

rates = extract.rates(calls = calls, puts = puts, k = k, s0 = s0, te = te)
rates