A call (or call option) is a contract that gives the holder the right to buy a stated number of units of the “underlying” asset at a given price (which is called the exercise price or strike prile, here we denote the price by X) from the counterparty (called the writer of the option).In the case of a European option,this right can be exercised on a given maturity date T,while for an American option it can be exercised at any time until the terminal date T.
+ Z% r& `) Z; z9 k Depending on the underlying asset on which the option is written, a call can be an option on a stock,a stock market index, a currency, a commodity, a bond, or an interest rate,or even a futures contract or a swap (“swaption”). Currency option is popular.
H2 a) P4 c7 X2 P A call option allows you to obtain only the “nice” part of a forward purchase. Rather than paying X for the foreign currency (as in a forward purchase),you pay no more than X, and possibly less than X |