The Language and Structure of Option Markets

The Language and Structure of Option Markets - 20-1•An...

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Unformatted text preview: 20-1•An option contract gives the holder the right-but not the obligation to buy or to sell an underlying security or commodity at a predetermined future date and at a predetermined price –Option to buy is a call option–Option to sell is a put option–Buyer has the long positionin the contract–Seller (writer) has the short positionin the contractThe Language and Structure of Option Markets20-2•Option Contract Terms–The exercise price (X) is the price the call buyer will pay to-or the put buyer will receive from-the option seller if the option is exercised–The option premium (C0,T)is the price that the option buyer must pay to the seller at Date 0 to acquire the option contract–European optionscan only be exercised only at maturity (Date T)–American optionscan be exercised any time The Language and Structure of Option Markets20-3•Option Valuation Basics–Intrinsic value represents the value that the buyer could extract from the option if he or she exercise the option immediately...
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This note was uploaded on 01/19/2012 for the course FIN 4360 taught by Professor Davidbray during the Spring '12 term at Kennesaw.

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The Language and Structure of Option Markets - 20-1•An...

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