Option

From Open Ideas
Jump to navigation Jump to search

Definition

An option is a contract that contains the right to demand the exchange of a cashflow or an asset against the payment of another cashflow or asset from the counterparty, the writer, at a certain instance of time or during certain periods of time.

A plain-vanilla call comprehends the right to request the delivery of an asset against the payment of a predefined price, the strike or exercise price. A plain vanilla put contains the right to demand the take-over of an asset against the payment of the strike price. The holder of an exchange option has the right to demand the exchange of an asset against another one. A call and a put can be regarded as special cases of an exchange option if there exists a an asset comparable to cash.