Lecture 14 Flashcards
Derivatives =
Securities that get their value from the price of other securities
Derivatives are traded
On both organised exchanges, and over the counter
Call option
Gives its holder the right to buy an asset:
- At the exercise/ strike price
- On/before the expiration date
One will exercise the option to buy the underlying asset if
The market value exceeds the strike price (what you paid for it)
Is the holder required to exercise their option?
No
If the option remains unexercised before the expiration date per the contract
The option expires, and no longer has any value
Put options
Give the holder the right to sell an asset:
- At exercise/ strike price
- On/ before the expiration date
One will exercise the option to sell the underlying asset if
The market value falls below the strike price
Upon exercise of a put option
The investor’s broker will purchase the necessary shares at the market price, and deliver these to the option writer for the exercise price
Owner of the put profits
By the difference between the exercise price and the market price
Purchase price of the option =
Premium
Sellers (writers) of options receive
Premium income
If the holder exercises their option
The writer (seller) must make (call) or take (put) delivery of the underlying asset
In the money =
Exercise of an option would be profitable
In the money > call
Exercise price < market price
