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The Option Value Of Coinage

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by Megan Barnett
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Apr 07 2009 10:42am EDT

The Option Value of Coinage

Is that a coin in your pocket, or is it a unit of long base metal with an embedded American put option with in¿nite time to maturity? According to a new paper by Espen Haug and John Stevenson, it’s both. And what’s more, that embedded put is highly volatile:

The value of modern currencies has recently gone from deep in-the-money through at-the-money to deeply out-of- the-money to deep in-the-money again, making the lack of sound analytical treatment all the more surprising.

Haug and Stevenson conclude that central banks should bone up on their option theory before minting new coins:

If the US Mint and other central banks had been fully aware of the embedded option they are issuing in their physical money they may have acted differently in the past.

Don’t they know that they’re giving these options away?

Reprinted from Reuters

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