Chapter 19 - Options markets. After studying this chapter you will be able to: Understand how call and put options are used and how they are priced, examine the instruments traded on the australian options market, understand how options can be used for either risk management or for speculative purposes. | Chapter 19 Options Markets Website: Learning Objectives Understand how call and put options are used and how they are priced Examine the instruments traded on the Australian options market Understand how options can be used for either risk management or for speculative purposes Chapter Organisation Introduction The Nature of Options Profits and Losses Organisation of the Market Pricing an Option Option Risk Management Strategies Conclusion: Options Versus Futures Revisited Summary Introduction Options differ from futures because they provide asymmetric cover against price movements Options limit the effects of adverse price movements without reducing profits from favourable price movements Options involve a premium to be paid by the buyer to the seller (writer) Chapter Organisation Introduction The Nature of Options Profits and Losses Organisation of the Market Pricing an Option Option . | Chapter 19 Options Markets Website: Learning Objectives Understand how call and put options are used and how they are priced Examine the instruments traded on the Australian options market Understand how options can be used for either risk management or for speculative purposes Chapter Organisation Introduction The Nature of Options Profits and Losses Organisation of the Market Pricing an Option Option Risk Management Strategies Conclusion: Options Versus Futures Revisited Summary Introduction Options differ from futures because they provide asymmetric cover against price movements Options limit the effects of adverse price movements without reducing profits from favourable price movements Options involve a premium to be paid by the buyer to the seller (writer) Chapter Organisation Introduction The Nature of Options Profits and Losses Organisation of the Market Pricing an Option Option Risk Management Strategies Conclusion: Options Versus Futures Revisited Summary The Nature of Options An option gives the buyer the right, but not the obligation, to buy or sell a specified commodity or financial instrument at a predetermined price (exercise or strike price), on or before a specified date (expiration date) An option will only be exercised if it is in the buyer’s best interest The Nature of Options (cont.) Types of options Call options Give the option buyer the right to buy the commodity or instrument at the exercise price Put options Give the buyer the right to sell the commodity or instrument at the exercise price Options can be exercised either Only on expiration date (European) Any time up to expiration date (American) The Nature of Options (cont.) Premium is the price paid by an option buyer to the writer (seller) of the option ‘Cap’—an options contract that places an upper limit on an interest rate ‘Floor’—an options contract that places a .
