Concept explainers
Explain the meanings of the following financial terms:
- a. Option
- b. Expiration date
- c. Strike price
- d. Call
- e. Put
a)
To discuss: The meaning of option.
Introduction:
A type of financial security whose value is derived from the value of a particular underlying asset is termed as derivative. This form of financial security consists of two or more parties who enter into an agreement to purchase or sell an asset at a specific price on a particular period. They are four types of derivative securities that are as follows:
- Forward contract
- Future contract
- Swap
- Option
Explanation of Solution
Option is a contract that involves the act of purchase a financial asset from one party and selling it to another party on an agreed price for a future date. There are two types of options. They are as follows:
- An option that buys an asset is called as call option
- An option that sells an asset is called as put option.
b)
To discuss: The meaning of expiration date.
Explanation of Solution
The last day or date, wherein the holder of a financial security has a right to exercise a particular option is termed as expiration date. In case of Country AM’s option, the right of the holder is exercised until the expiration date, whereas in Country E’s option, the option is exercised only on the expiration date.
c)
To discuss: The meaning of strike price.
Explanation of Solution
A particular price at which the option holder has the right to sell or purchase a specified asset is termed as strike price. It is also termed as exercise price.
d)
To discuss: The meaning of call option.
Explanation of Solution
The right of an individual to purchase an asset at the price that is fixed and at a specific period is the call option.
e)
To discuss: The meaning of put option.
Explanation of Solution
Put option is a contract that is made by two investors to sell or buy an underlying asset. This option is constructed to mitigate the downside risk of an underlying asset.
Want to see more full solutions like this?
Chapter 20 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Additional Business Textbook Solutions
Foundations Of Finance
Foundations of Finance (9th Edition) (Pearson Series in Finance)
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Managerial Accounting (4th Edition)
Microeconomics (9th Edition) (Pearson Series in Economics)
- Define the terms, or give short explanations. -dollar return -equilibrium -financial asset -financial engineering -financial risk -forward contractarrow_forwardWhat is the correct way to determine the value of a long forward position at expiration? The value is the price of the underlying ... ... multiplied by the forward price. ... divided by the forward price. ... plus the forward price. ... minus the forward price please need type answer not an imagearrow_forwardWhat is payoff to put option holder on expiry?arrow_forward
- Repo Instruments, Term Money and Call Money are part of a. Forex Market b. Money market c. Capital Market d. Commodity Marketarrow_forwarda)explain the concept of the delta normal method for calculating VAR when options are present in the portfolio. b)explain the basic concepts of the historical method and the Monte Carlo simulation method of calculating VARs. c)discuss the benefits and limitations of VAR. d)define credit risk (default risk). e)explain how option pricing theory can be used in valuing default risk.arrow_forwardExplain what is meant by “initial margin” on a futures contractarrow_forward
- Discuss the payoff structures for call and put options and the determinants of call and put option prices. Explain how the option pricing theory can be applied in credit risk modelling.arrow_forwardDistinguish between the initial rate of interest and the expected yield on an ARM. What is the general relationship between the two? How do they generally reflect ARM terms?arrow_forwardFair value is determined as: Select one: a. The current entry price. b. The current exit price. c. A future exit price. d. A future entry price.arrow_forward
- Define each of the following terms: i. Investment timing option; growth option; abandonment option; flexibility optionarrow_forwardi. When interest rates __________, the market required rates of return ________, and thebond prices will ________.arrow_forwardA) Explain the relationship between strike prices and implied volatilities under a price jump scenario. B) How does a dividend payment impact the option price?arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning