Page 80 - DCOM510_FINANCIAL_DERIVATIVES

Unit 5: Introduction to Options

European options: European options are options that can be exercised only on the expiration Notes
date itself.
Expiration date: The date specified in the options contract is known as the expiration date, the
exercise date, the strike date or the maturity.
Index derivatives: Index derivatives are derivative contracts which derive their value from an
underlying index.
Option Premium: The “price” an option buyer pays and an option writer receives is known as
the premium.

Option: An option is a contract that gives the buyer the right, but not the obligation, to buy or
sell an underlying asset at a specific price on or before a certain date.
Put option: A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price.

5.8 Review Questions

1. What do you mean by options and option market? Discuss with suitable examples.
2. Discuss in detail the historical background and uses of option market.

3. Discuss the difference between futures and option contract with suitable examples.
4. Write a detailed note on the important terms and trading mechanism of option market.
5. Distinguish between American Options and European Options.

6. List and explain the role of market players in option trading.
7. “Options contracts are relatively more safe derivative instruments”. Explain this statement.
8. Illustrate ‘in-the-money’ and ‘out-of-the-money’ positions in both call option and put
option.
9. Write short notes on:
(a) Option premium
(b) Vanilla Options
(c) Real Options

10. What do you understand by option value? Discuss the concept of time value and intrinsic
value.

Answers: Self Assessment

1. Calls, puts 2. European, American

3. Index, stock 4. Option price
5. American 6. European
7. Time value 8. Strike price
9. False 10. False

11. True 12. True
13. True 14. False

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