As a risk management tool, options allow banks and corporates to hedge market exposure but also to gain from upside moves in the market; this makes them unique amongst hedging instruments. Options have special characteristics that make them stand apart from other classes of derivatives. As they confer a right to conduct a certain transaction, but not an obligation, their payoff profile is different from other financial assets, both cash and off-balance sheet (OBS). This makes an option more of an insurance policy rather than a pure hedging instrument, as the person who has purchased the option for hedging purposes need only exercise it if required. The price of the option is in effect the insurance premium that has been paid for peace of mind.
KeywordsOption Price Call Option Future Contract Strike Price Underlying Asset
Unable to display preview. Download preview PDF.
Selected Bibliography and References
- Chance, D. An Introduction to Options and Futures Markets, Dryden Press, 1989.Google Scholar
- Galitz, L. Financial Engineering, FT Pitman, 1993.Google Scholar
- Grabbe, J. O. International Financial Markets, 2nd edn, Elsevier, 1991.Google Scholar
- Hull, J. Options, Futures and Other Derivatives, 4th edn, Prentice Hall, 1999.Google Scholar
- Jarrow, R. and Turnbull, S. Derivative Securities, 2nd edn, South-Western, 1999.Google Scholar
- Levy, H. Introduction to Investments, 2nd edn, South-Western Publishing, 1999, chs 22–25.Google Scholar
- London International Financial Futures and Options Exchange, LIFFE Options, LIFFE, 1999.Google Scholar
- Livingstone, M. Money and Capital Markets, 2nd edn, New York Institute of Finance, 1993, ch. 19.Google Scholar
- McMillan, L. Options as a Strategic Investment, New York Institute of Finance, 1986.Google Scholar