Premium Essay

Financial Derivatives: Option's Market

In: Business and Management

Submitted By Felixgr
Words 767
Pages 4
1) Explain what options are.
2) Talk about different option markets.
3) Talk about American market.
4) Talk about European market.
5) Explain major differences.

1) An option is a financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

Options are extremely versatile securities that can be used in many different ways. Traders use options to speculate, which is a relatively risky practice, while hedgers use options to reduce the risk of holding an asset.

Now that i have explained what an option is i will show you the different types.
There are two main types of Options:
1) European Options:
An option that can only be exercised at the end of its life, at its maturity.

2) American Options:
An option that can be exercised anytime during its life. The majority of exchange-traded options are American.

European options normally trade over the counter(which means that are traded through a dealer network rather than in a centralized exchange) while American options usually trade on standardized exchanges.
Even though that European options can not be exercised before their maturity date, if a buyer of an European option does not want to wait for maturity to exercise, it can sell the option to close the position.

European options tend to sometimes trade at a discount to its comparable American option. This is because American options allow investors more opportunities to exercise the contract.

If we dig a little deeper we find the following relationships:

For a non-dividend paying stock, a call option with American terms should be the same…...

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