Abstract

The standpoint of this paper is the "Mark-Up Interest" on Options. The Mark-Up Interest is regarded as the reward on the hedging portfolio to compensate for possible losses. For presenting this, Options market prices are decomposed into the Fair-game Options Prices and the Mark-Up Interests. The Options pricing model formed with the Mark-Up Interest, Put-Call Parity, Implied Underlying Price, and Guessed Volatility is used to solve the internal inconsistence caused by the Implied Volatility Smiles. Therefore, the justness of the options market prices could be estimated with the Mark-Up Interests under different scenarios. The result will help the risk manager to do market making and hedging. The empirical results based on the Options on Taiwan Stock Exchange Weighted Stock Index (TXO) in this paper are as follows: The trading days to expiry, Moneyness, and Guessed Volatility are the factors affecting the Mark-Up Interests.