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Financial Derivatives                                    Rupesh Roshan Singh, Lovely Professional University




                   Notes                            Unit 5: Introduction to Options

                                    CONTENTS
                                    Objectives

                                    Introduction
                                    5.1  Options Contracts
                                         5.1.1  Features of the Options Contracts
                                         5.1.2  Options that are Currently Traded in the Market
                                    5.2  Option Terminology
                                    5.3  Types of Options
                                         5.3.1  Call Option
                                         5.3.2  Put Option
                                    5.4  Distinction between Futures and Options
                                         5.4.1  Comparison between Futures and Options
                                    5.5  Index Derivatives
                                         5.5.1  Features of Index Derivatives
                                         5.5.2  Contract Specification for Index Options

                                         5.5.3  Contract Specifications for Stock Futures
                                    5.6  Summary
                                    5.7  Keywords
                                    5.8  Review Questions
                                    5.9  Further Readings

                                  Objectives

                                  After studying this unit, you should be able to:

                                       Discuss the meaning and features of options contracts;
                                       Define the key terms used in options;
                                       Describe the basic types of options;
                                       Distinguish between futures and options;
                                       Explain the meaning and features of index derivatives.
                                  Introduction


                                  In the previous unit, we studied about the concept of future contracts and the terminologies used
                                  in it. We also discussed about the distinction between futures and forwards contracts. This unit
                                  will helps you to understand the concept of and features of options contracts. We will also
                                  discuss the key terms used in options. The various sections and sub section of this unit will also
                                  summarise the basic types of options, distinction between futures and options and concept of
                                  index derivatives.
                                  As seen earlier, futures are derivative instruments where one can take a position for an asset to
                                  be delivered at a future date. But there is also an obligation as the seller has to make delivery and



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