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1.  
1. ''Derivative instrument.''


A financial option is a derivative instrument giving the holder the right - but not the obligation - to buy or sell an underlying asset on or before a future date at a specified price.
A financial option is a derivative instrument giving the holder the right - but not the obligation - to buy or sell an underlying asset on or before a future date at a specified price.


Options are more commonly ‘cash settled’ by paying or receiving a net cash amount, rather than being settled by physical delivery of the underlying asset.
Options are more commonly ‘cash settled’ by paying or receiving a net cash amount, rather than being settled by physical delivery of the underlying asset.


Like other derivative instruments, options can be used to:
Like other derivative instruments, options can be used to:
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• Arbitrage in combination with other related instruments to achieve 'risk free' profits.
• Arbitrage in combination with other related instruments to achieve 'risk free' profits.


When used for hedging purposes, options generally provide insurance-like protection against worst case outcomes.  (Contrasted with 'fixing' hedging instruments - such as FRAs - which effectively fix the market rate being hedged.)
 
When used for hedging purposes, options generally provide insurance-like protection against worst case outcomes.   
 
(Contrasted with 'fixing' hedging instruments - such as FRAs - which effectively fix the market rate being hedged.)




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== See also ==
== See also ==
* [[American-style option]]
* [[American-style option]]
* [[Arbitrage]]
* [[Asian option]]
* [[Barrier option]]
* [[Binomial option pricing model]]
* [[Binomial option pricing model]]
* [[Black Scholes option pricing model]]
* [[Black Scholes option pricing model]]
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* [[Fixing]]
* [[Fixing]]
* [[Fixing instrument]]
* [[Fixing instrument]]
* [[Foreign exchange forward contract]]
* [[Futures contract]]
* [[Greeks]]
* [[Greeks]]
* [[Hedging]]
* [[Hedging]]
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* [[Interest rate guarantee]]
* [[Interest rate guarantee]]
* [[Interest rate option]]
* [[Interest rate option]]
* [[Liquidity event]]
* [[Outright]]
* [[Outright]]
* [[Payoff]]
* [[Payoff]]
* [[Premium]]
* [[Put option]]
* [[Put option]]
* [[Put-call parity theory]]
* [[Put-call parity theory]]
* [[Real option]]
* [[Real option]]
* [[Speculation]]
* [[Straddle]]
* [[Straddle]]
* [[Strike price]]
* [[Strike price]]
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* [[Underlying asset]]
* [[Underlying asset]]
* [[Underlying price]]
* [[Underlying price]]
* [[Vesting]]
* [[Volatility index]]
* [[Warrant]]
* [[Warrant]]
[[Category:Manage_risks]]

Latest revision as of 20:19, 29 May 2024

1. Derivative instrument.

A financial option is a derivative instrument giving the holder the right - but not the obligation - to buy or sell an underlying asset on or before a future date at a specified price.

Options are more commonly ‘cash settled’ by paying or receiving a net cash amount, rather than being settled by physical delivery of the underlying asset.


Like other derivative instruments, options can be used to:

• Speculate by creating new exposures to market rates.

• Hedge existing exposures to changes in market rates.

• Arbitrage in combination with other related instruments to achieve 'risk free' profits.


When used for hedging purposes, options generally provide insurance-like protection against worst case outcomes.

(Contrasted with 'fixing' hedging instruments - such as FRAs - which effectively fix the market rate being hedged.)


2.

More generally, choice.


3.

A real option is an option relating to an operational decision or outcome.


See also