Questions On Options And Options

1878 WordsMar 27, 20178 Pages
③ Options Options are traded both on exchanges and in the over-the-counter market. There are two types of option which are call option, giving the holder the right to buy the underlying asset by a certain date for a certain price, and put option, giving the holder the right to sell the underlying asset by a certain date for a certain price, while both the counter-parties only have obligations (usually the speculators). Apart from that, depending on the expiration date, American options can be exercised at any time up to the expiration date while European options can be exercised only on the maturity itself. Because of the right that options provide to the holder to decide whether or not to exercise the contract, there is a cost to…show more content…
And all the difference here is the reason why options require a premium. ④ Swaps Swaps now occupy a position of central importance in over-the-counter derivatives market. The statistics produced by the Bank for International Settlements show that about 58.5% of all over-the-counter derivatives are interest rate swaps and a further 4% are currency swaps. A swap is an over-the-counter agreement between two parties to exchange cash flows in the future. The agreement defines the dates when the cash flows are to be paid and the way in which they are to be calculated. Usually the calculation of the cash flows involves the future value of an interest rate, an exchange rate, or other market variable. The most popular (plain vanilla) interest rate swap is one where LIBOR is exchanged for a floating rate of interest. In this swap, one party agrees to pay the other party interest at a fixed rate on a notional principal for a number of years. In return, it receives interest at a floating rate on the same notional principal for the same period of time. Principal amounts are not usually exchanged in the interest rate swap. Take another popular swap as an interpretation for hedging and speculation, which is currency swap. In its simplest form, this involves paying interest on a principal amount in one currency and receiving interest on a principal in another currency.
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