OPTIONS
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Risk Management (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 65 rapid-fire Q&A cards.
What is an option in the context of financial derivatives?
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specified date.
What is the payoff of a call option at expiry?
Maximum of (spot price minus strike price) or zero
What is the difference between a call option and a put option?
A call option gives the holder the right to buy the underlying asset, while a put option gives the holder the right to sell the underlying asset at the strike price.
What is the payoff of a put option at expiry?
Maximum of (strike price minus spot price) or zero
What is the strike price (exercise price) of an option?
The strike price is the predetermined price at which the holder of an option can buy (call) or sell (put) the underlying asset when the option is exercised.
What does 'at-the-money' (ATM) mean for an option?
Strike price equals the current market price of underlying
What is the option premium?
The option premium is the price paid by the buyer to the seller (writer) for acquiring the rights conferred by the option contract; it is the maximum loss for the option buyer.
What is the maximum gain for a buyer of a call option?
Unlimited, as the underlying price can rise indefinitely
Video classes for this chapter
More chapters in Module F
Master the full RM syllabus
Every chapter of Risk Management (Elective) — videos, tests, notes and one-liner decks in one place.