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Post by samford71 on Sept 22, 2018 12:19:50 GMT
On a side issue are you asking to pay £10k for a two year £400k put (on a £500k house), or for a two year insurance product which will pay in a falling market to make you back to £500k, providing the prices don't fall below £400k? Good question. I think I am asking for the latter. I think you are asking for 2-year put spread, strikes 500/400 (so buy a put at 500, sell a put at 400). Max payout is £100k at £400k. The problem is what is that going to cost. Wanting 10:1 leverage on an illiquid, untradeable underlying is a huge ask. House price volatility annually is around 5% (Nationwide index). The 2-year forward price of a house is a debatable value. You could argue that you borrow £500k at 3.5% (SVR rates), and the imputed yield is say 4.5%, to give you a net yield of 1%. So the house prices can fall 2% over two years, to give you a breakeven forward price at say £490k. Assume risk-free is 1%, a Black Scholes model throws out the price of a £500k strike put at £14k, and the £400k at close to zero. There is no point selling the £400k strike. Given the fact this is totally untradeable and illiquid, the price will clearly be substantially higher than my "back of the envelope" number.
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bigfoot12
Member of DD Central
Posts: 1,817
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Post by bigfoot12 on Sept 22, 2018 15:18:20 GMT
Good question. I think I am asking for the latter. I think you are asking for 2-year put spread, strikes 500/400 (so buy a put at 500, sell a put at 400). Max payout is £100k at £400k. The problem is what is that going to cost. Wanting 10:1 leverage on an illiquid, untradeable underlying is a huge ask. House price volatility annually is around 5% (Nationwide index). The 2-year forward price of a house is a debatable value. You could argue that you borrow £500k at 3.5% (SVR rates), and the imputed yield is say 4.5%, to give you a net yield of 1%. So the house prices can fall 2% over two years, to give you a breakeven forward price at say £490k. Assume risk-free is 1%, a Black Scholes model throws out the price of a £500k strike put at £14k, and the £400k at close to zero. There is no point selling the £400k strike. Given the fact this is totally untradeable and illiquid, the price will clearly be substantially higher than my "back of the envelope" number. If I were you I'd bite his hand off and grab the £400k put at close to zero!
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