Option: Difference between revisions
imported>Administrator (CSV import) |
imported>Doug Williamson m (Spacing 21/8/13) |
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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. | ||
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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.) | ||
2. | 2. | ||
More generally, choice. | More generally, choice. | ||
3. | 3. | ||
A real option is an option relating to an operational decision or outcome. | A real option is an option relating to an operational decision or outcome. | ||
== See also == | == See also == | ||
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* [[Underlying price]] | * [[Underlying price]] | ||
* [[Warrant]] | * [[Warrant]] | ||
Revision as of 14:55, 21 August 2013
1.
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
- 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
- Hedging
- Insurance
- Interest rate guarantee
- Interest rate option
- Payoff
- Put option
- Put-call parity theory
- Real option
- Straddle
- Strike price
- Swaption
- Traded option
- Underlying asset
- Underlying price
- Warrant
