Options
Right to buy an asset
on specified price at specified date. It is important to remember that option
is a right and not obligation and you may exercise the option or leave it. For
example you want to buy some share in future at price $ 10 on (31 March, 2015).
On 31 march the open price is only $ 8 so you would like to lapse the option
and buy the share in market. On other hand if the price is $ 12 then you may
exercise the option at exercise price i.e. $ 10.
European & American options
European option: one can exercise the option at exercise date (fixed date)
American option: one can exercise the option on or before exercise date.
It is important to
remember that both option lapse at exercise date and cannot be exercise after
exercise date.
Types of Option
1. Call option: -
Right of buying an asset
2. Put option: -
Right of selling an asset
3. Premium:- Amount paid to the seller as premium
Options & Forward Contract
Option and forward contract are two different things. In
option don’t have obligation to execute the contract but in case of forward you
are bound to execute the contract at specified date. Furthermore forward
contract does not involve any premium.
