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Chapter 11 - Chapter 11 Introduction to Options Markets I...

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Chapter 11: Introduction to Options Markets I. Option Contract Defined - exchange traded options offer 3 advantages; exercise price and expiration date of contract are standardized, direct link between buyers and sellers severed, transaction costs are lower than for OTC options - liquidity concern of OTC options not a big deal because most dealers use OTC options as part of an asset/liability strategy intended to hold them until expiration II. Differences Between Options and Futures Contracts - only one part is obligated to act (writer) on an option contract - the risk/reward characteristics of the two contracts are different - buyer of contract realizes a dollar-for-dollar gain when price of futures contract changes - options don’t provide symmetric risk/reward relationship; used to protect against asymmetric risk in hedging III. Risk and Return Characteristics of Options - should consider the time value of money and the interest that could have been earned when measuring the break even point IV. Pricing of Options
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