Define each of the following terms:a. Option; call option; put optionb

QUESTION

Define each of the following terms:a. Option; call option; put optionb. Exercise value; strike pricec. Black-Scholes Option Pricing Model
Option: is a financial derivative which gives the holder (purchaser) a right (not an obligation) to buy or sell the underlying asset at a predetermined price on or before the decided date. For option seller, its an obligation to fulfill the contract if the holder decides to exercise it. Call Option: is the option that gives the holder a right to buy the asset. Call option is purchased when a person expects that the market price of the underlying asset will rise in future, so that the purchaser (option holder) could exercise the option, get the asset at pre-determined (exercise) price, and sell the asset in the market to get the differential amount as profit. Put Option: is the option that gives the option holder a right to sell the asset. Put option is purchased when the buyer expects that the price of the asset will fall in future, so that the purchaser could sell the¦

asset at higher pre-determined exercise price, instead of selling it at a lower market price. Exercise value: is the value of an in-the-money option, if it was exercised today. Exercise value for: call option = market price strike price, put option = strike price market price. Strike price: is the price decided at the time of the option contract, at which the option holder would exercise the option, if she chooses to do so. Black-Scholes Option Pricing model: is a model used for calculating price of European options, developed by Fischer Black, Myron Scholes and Robert Merton.

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