Options Embedded in Physical Money

In a recent article I published together with a former co-worker (Stevenson) we look at embedded options in money. The full version can be found in the Wilmott Magazine, an unedited short working paper version can be downloaded for free at the wilmott website.

Coins are physical metal with embedded put options, typically issued deep-in-the-money, but have in recent times for several circulating US coins been going from deep in-the-money to out-of-the-money to in-the money again.

Some people probably took advantage of certain arbitrage opportunities in US coins back in 2006. As described in the paper in the end of 2006 the US mint changed the rules and knocked out part of the option element in coins.

For precious metal coins the put option is on the other hand typically issued far out-of -the-money.