In: Finance
Explain the following terms: option, spread, and arbitrage.
Answer-
Option -
An option is a contract in which the holder the right but not the obligation to buy or sell an underlying asset at a specified price called as strike price prior to or on a specified date. Options are of two types call options and put options.
Spread-
The spread is defined as the difference between two prices, rates or yields. Examples are bid-ask spreads and Credit Default Spreads.
Arbitrage-
Arbitrage is the strategy of taking advantage of price differences in two or more markets for the same or identical financial asset.