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In: Finance

Explain the following terms: option, spread, and arbitrage.

Explain the following terms: option, spread, and arbitrage.

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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.


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