Alternative investments jingling around in your pocket
| Apr 15th, 2009 | Filed under: Academic Research, Editor's Pick, Today's Post | By: Alpha Male |
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One of the hallmarks of an alternative investment is an option-like payoff – a return distribution that is truncated or skewed. If that is the case, then the ubiquitous penny and quintessential nickel could be the most popular alternative investments in the United States (and, we suspect, in many other countries around the world in similar forms).
According to an article by Espen Haug and John Stevenson, physical currencies – particularly those made from copper and nickel contain an option that is close enough to the money to have a material value and has even been in the money in the recent past.
Haug and Stevenson point out that pennies and nickels can be converted into electronic money at their face value, but that they also contain copper and nickel that, in 2007, was worth more than the denominations themselves. Put another way, pennies and nickels are really just long positions in copper and nickel combined with a put option on each with strike prices of one cent and five cents. If the price of the copper in a penny goes above one cent, the option is worthless. Likewise, if the price of the nickel in a nickel goes above five cents, the option is also out of the money. More…
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