Question

In: Finance

financial derivatives "owners of options have rights and sellers of options have obligation" what does this...

financial derivatives

"owners of options have rights and sellers of options have obligation"

what does this sentence mean?

Solutions

Expert Solution

Options are of 2 types:

Call option &

Put option

Owner of a call option have at right to buy at pre-decided price (strike price) at the predetermined date (expiry date).

Owner of call option won't execute his right to buy stock if strike price on expiry is more than market price.

He would rather buy from market and not excercise his right to buy the stock at strike price.

However, if strike price is lower than the market price, owner of option will excercise his right to buy at strike price.

And when owner of option excercise his right, seller of optiion is under obligation to sell the stock at strike price which is lower than market price. Thus seller of option does not have any right but is under obligation

Similarly, Owner of a put option have at right to sell at pre-deceided price at the predetermined date (expiry date). While buyer of put option is under obligation to buy the stock at strike price if option buyer excercise his right to buy.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

What are the rights and duties of the CPA? What obligation does the CPA have to...
What are the rights and duties of the CPA? What obligation does the CPA have to a user of the document who did not pay for the report? What right does the client have to direct the work of the CPA? Is a client always owed the duty of confidentiality?
What claim does an employer have on a persons feelings, rights and privacy? What rights are...
What claim does an employer have on a persons feelings, rights and privacy? What rights are you willing to give up to be employed? what rights can an employer justifiably limit In a workplace?
Derivatives and risk management: OPTIONS PRICING -What is meant by put-call parity? -How does the concept...
Derivatives and risk management: OPTIONS PRICING -What is meant by put-call parity? -How does the concept of a synthetic call (i.e. long call and a long put) set the stage for put-call parity? -How does this result in an equilibrium value for a put option?
Options as Insurance Instruments Clearly, given that options allow their owners to take certain financial actions...
Options as Insurance Instruments Clearly, given that options allow their owners to take certain financial actions in favor of their portfolio objectives, they can be thought of as financial insurance: if the price of the underlying assets moves in an unfavorable direction, the option can be exercised to restrict the losses to be experienced. The value of this form of insurance is affected by both the dynamics of the underlying assets and the type of option used. The overall insurance...
what is the Role of Derivatives in the recent Financial Crisis? with details
what is the Role of Derivatives in the recent Financial Crisis? with details
You have the following information about forward and options contracts on the same stock. All derivatives...
You have the following information about forward and options contracts on the same stock. All derivatives have one-year maturity. Risk-free rate is 10%. S0 = $45.25, F0,1 = %50, CK=45 = $7.70, CK=45 = $5.40, PK=45 = $3.20, and PK=50 = $5.40. What is the profit if you hedge a short position of the stock with a 45-strike call if the stock price at maturity is $47?
What offensive strategy options does an athletic footwear company have?
Business Strategy and PolicesBusiness strategy game*What offensive strategy options does an athletic footwear company have? Identify al least two offensive moves that a company should seriously consider to improve the company's market standing and financial performance?*What doe it mean when a company is vertically integrated? explain and give an example.
(Derivatives & Risk Management - BOPM: Binomial Options Pricing Model) -What is the significance of delta...
(Derivatives & Risk Management - BOPM: Binomial Options Pricing Model) -What is the significance of delta to the BOPM? - -How does it (delta) relate to the concept of a replicating portfolio and why is that important? (Derivatives & Risk Management - BOPM - Binomial Options Pricing) -Explain the no-arbitrage approach to valuing options with the Binomial options pricing model. --Explain why the no-arbitrage condition must exist for a call. In other words, explain what it means for a call...
In Financial Derivatives Consider the two-period, Binomial Options Pricing Model. The current stock price S= $105...
In Financial Derivatives Consider the two-period, Binomial Options Pricing Model. The current stock price S= $105 and the risk-free rate r = 3% per period (simple rate). Each period, the stock price can go either up by 10 percent or down by 10 percent. A European call option (on a non-dividend paying stock) with expiration at the end of two periods (n=2), has a strike price K = $100. The risk-neutral probability of an “up” move is q = (R-D)/(U-D),...
In Financial Derivatives Consider the two-period, Binomial Options Pricing Model. The current stock price S= $105...
In Financial Derivatives Consider the two-period, Binomial Options Pricing Model. The current stock price S= $105 and the risk-free rate r = 3% per period (simple rate). Each period, the stock price can go either up by 10 percent or down by 10 percent. A European call option (on a non-dividend paying stock) with expiration at the end of two periods (n=2), has a strike price K = $100. The risk-neutral probability of an “up” move is q = (R-D)/(U-D),...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT