Page 245 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes Options contract gives the holder of the contract the option to buy or sell the asset at a
specified price on or before a specific date in the future.
The option is sold by the seller (writer) to the purchaser (holder) in return for a payment
(premium).
In a European option, the holder of the option can exercise his right (if he desires) only on
the expiration date.
In a call option the buyer receives the right, but not the obligation to buy a given quantity
of the underlying asset at an exercise price or strike price on or before a given future date
called 'maturity date' or 'expiry date.'
The put option gives the buyer the right but not the obligation, to sell a given quantity of
the underlying asset at a given price on or before a given expiry date.
In determination of prices of the options, some of the important factors like future price,
strike price, interest rates, time of the option, volatility of the market, etc., will exert their
influence.

8.7 Keywords

Arbitrageurs: Riskless profit making is the prime goal of arbitrageurs. Buying in one market
and selling in another, buying two products in the same market are common.
Credit Derivative: A financial instrument used to mitigate or to assume specific forms of credit
risk by hedgers and speculators.
Hedgers: The objective of these kinds of traders is to reduce the risk. They are not in the derivatives
market to make profits. They are in it to safeguard their existing positions.
Put Option: The reverse of the call option deal. Here, there is a contract to sell a particular
number of underlying assets on a particular date at a specific price.

Speculators: They are traders with a view and objective of making profits. They are willing to
take risks and they bet upon whether the markets would go up or come down.

8.8 Self Assessment

Fill in the blanks:

1. ................ could be making money even without putting their own money in.
2. A ................ gives the buyer the right but not the obligation to buy a given quantity of the
underlying asset.

3. The ................ contract margin is the basis of a contractual commitment.
4. The price at which the underlying asset would be bought in the future at a particular date
is the ................ or the ................

5. The date on the ................ contract is called the 'Exercise date', 'Expiration Date' or the 'Date
of Maturity.'
6. ................ options are those where the buyer takes delivery of undertaking (calls) or offers
delivery of the undertaking.
7. The key difference between futures and options is that the former involves ................,
whereas the latter confer ................

240 LOVELY PROFESSIONAL UNIVERSITY