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The Eurodollar Futures and Options Handbook by Galen Burghardt

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CHAPTER 19Price, Volatility, and Risk Parameter Conventions

Early on in the life of options on Eurodollar futures, the market gravitated to the idea of thinking about the volatility of the underlying futures rate but quoting the options in terms of price. Thus, the price of a Eurodollar option depends on the distribution of the underlying rate, and the volatilities are quoted as relative rate volatilities. But an option’s strike or exercise price refers to the underlying futures price.

PRICING OPTIONS ON FUTURES

The list of inputs or assumptions required to price an option on a futures contract is shorter than it is for options on spot commodities. With options on spot commodities, one typically needs three pieces of information for the model ...

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