Option

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
• Outright
• Payoff
• Put option
• Put-call parity theory
• Real option
• Straddle
• Strike price
• Swaption
• Traded option
• Underlying asset
• Underlying price
• Warrant