Question

1. What is meant by option’s intrinsic value?
2. Define Spot Rate.
3. What is a derivative?
4. What is foreign currency transaction?

Answer 1

Question 1: Intrinsic value refers to the inherent value of the option, It also refer to the difference in the price of strike price and the value of underlying asset it has. It is generally used to measure the profit which is trading price subtracted by it's Intrinsic Value.

The intrinsic value is used to determine the asset total worth and then it is analysed whether it is overprice or underpriced.

Question 2: Spot rate refers to the rate which is the current market price of the securities that is available for the immediate settlement, the spot rate is very volatile and keeps changing according to the demand and supply of the securities. For example, It is used in Foreign exchange conversion

Question 3: A derivative refers to the securities that are secondary securities means it's value is derived from the primary security of the that is the underlying asset. A derivative doesn't have any value on it's own, when the primary security value fluctuates, it started to move accordingly.

Derivatives gives the power to an investor to predict the change in the price of the security whether it will go upward and downward. Then, according to the forces the price of security fluctuates.

Common Derivative Instruments are Options, Future Contracts, Forward Contracts etc.

Question 4: Foreign currency transaction refers to buying and selling of the currency that is not of his country's currency. For example, For a US resident the trading in Euro will be the foreign currency.

The price of foreign currency keeps fluctuating according to the demand and supply.