Option: Difference between revisions
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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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* [[Interest rate guarantee]] | * [[Interest rate guarantee]] | ||
* [[Interest rate option]] | * [[Interest rate option]] | ||
* [[Liquidity event]] | |||
* [[Outright]] | * [[Outright]] | ||
* [[Payoff]] | * [[Payoff]] | ||
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
- American-style option
- Arbitrage
- Asian option
- Barrier option
- Binomial option pricing model
- Black Scholes option pricing model
- Call option
- Cash settlement
- Delta
- Derivative instrument
- European-style option
- Exercise
- Exotic option
- Fixing
- Fixing instrument
- Foreign exchange forward contract
- Futures contract
- Greeks
- Hedging
- Insurance
- Interest rate guarantee
- Interest rate option
- Liquidity event
- Outright
- Payoff
- Premium
- Put option
- Put-call parity theory
- Real option
- Speculation
- Straddle
- Strike price
- Swaption
- Traded option
- Underlying asset
- Underlying price
- Vesting
- Volatility index
- Warrant
