02-05-2014, 11:48 AM
Financial Terms related to Option
Financial Terms.pdf (Size: 314.4 KB / Downloads: 10)
OPTION
Abandonment option
• The option of terminating an investment earlier than originally planned.
American option
• An option that may be exercised at any time up to and including the expiration
date. Related: European option
• An option that may be exercised at any time during the life of the option. Stock
options that trade in U.S. option exchanges, such as the CBOE, are of American
types. Index options are of either American (option on S&P100 index, called OEX) or
European types (option on S&P500 index, called SPX). See call and put options.
American style option
• Is an option which permits exercise prior to the indicated expiration date. This
compares to an European Style option which can only be exercised on the expiration
date.
Basket options
• Packages that involve the exchange of more than two currencies against a base
currency at expiration. The basket option buyer purchases the right, but not the
obligation, to receive designated currencies in exchange for a base currency, either
at the prevailing spot market rate or at a prearranged rate of exchange. A basket
option is generally used by multinational corporations with multicurrency cash flows
since it is generally cheaper to buy an option on a basket of currencies than to buy
individual options on each of the currencies that make up the basket.
Black scholes option model
• Is the seminal work about options pricing models. It was developed by Fisher Black
and Myron Scholes. It initially focused on securities prices. Subsequently, it was
refined by Fisher Black for the futures markets. Most options models depart from this
seed. This important work was published by Fischer Black and Myron Scholes in the
May-June 1973 edition of The Journal of Political Economy. It laid the foundation for
the quantitative analysis and practical calculation of puts and calls. The model
indicated that options would eliminate risk from stock portfolios subject to some
assumptions. The lognormal model stated that option values could be determined by
using the current stock price, time left to expiration, the strike or exercise price, the
variance of the stock's rate of return (standard deviation applied) and the risk-free
rate of interest.
Embedded option
• Is an option whose characteristics are implied but not explicitly specified. One
notable example is the option granted a mortgagor (home owner) by the lender. The
mortgagor has the right to prepay the mortgage at any time but is not required to do
so in any specified manner.
• An option that is part of the structure of a bond that provides either the bondholder
or issuer the right to take some action against the other party, as opposed to a bare
option, which trades separately from any underlying security.