Options

Question 1

What are the exercise styles? Give a description for each of them.

Answer 1

1. European : exercise only at expiration
2. American : exercise anytime
3. Bermudan : exercise at specifies times

Question 2

What does it mean when an option is at-the-money?

Answer 2

Strike price = current price of underlying asset

Question 3

What does it mean when an option is in-the-money?

Answer 3

Exercising the option would result in a positive call settlement.
Call : strike price < current price
Put : strike price > current price

Question 4

What does it mean when an option is out-of-the-money?

Answer 4

Exercising the option would result in a negative cash settlement. (options are not exercised when they are out-of-the-money)

Question 5

A call can provide insurance against which risk?

Answer 5

Rising prices (call sets a higher bound on the price of an asset you will need in the future).

Question 6

A put can provide insurance against which risk?

Answer 6

Drop in prices (guarantees a minimum selling price for the asset).