Financial solutions - Options

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Financial contracts giving the right but not the obligation to buy a commodity, currency, or interest rate at a specific price.

Options can manage risks in:

  • Foreign exchange rates
  • Commodity prices
  • Interest rates

Put Options

Pays if a market falls.

Call Options

Pays if a market rises.

Both have a buyer and a seller and both have a fixed duration before expiration.

Both have a price for using the option called a strike price.

The strike price is the market price at which the option pays out, whether it is a Put option or a Call option.

It is the strike price that triggers the option

Buyer side

An option is either in the money (In the pay zone above/below the line) or out of the money (worth nothing above/below the line)

If it's at the strike price, it's at the money.

Seller side

Reverse the above.

Option seller is called the option seller.

Options are paid for in advance.

Options insure against one risk but introduce counterparty risk

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