1. 11 Financial Derivatives

2. 22 3. Basic Understanding about Option i.Option Contract are Financial Derivatives where one party buys the right (called option buyer) and other party sells the Right called option seller or option writer. The option buyer pays Compensation (called option premium) to but the right to the option seller. Party A Party B Buys a right Sells a right * Only Right * Only Obligation * No Obligation * No Right Premium

3. 33 ii. What is mentioned in the Right ? Buyer can get either of the two things: Right to buy the underlying Right to sell the underlying Call Option Put Option When seller sell Call Option he will receive premium and buyer option gets right to Buy Underlying When seller sell Put Option he will receive premium and seller option gets right to Sell Underlying iii.Intrinsic Value and Time Value Option price = Intrinsic Value + Time Value Quoted in the market (or we can calculate theortical value) Compare Spot Price of underlying with the strike price of option to calculate Time value Balancing Figure

4. 44 iv. Option Terminology Option Buyer Option Seller (writer) Option Premium (price) : Compensation payable to buy the Right. Strike price/ Exercise price : This is the price at which underlying can be bought or sold by the option buyer. American Option : Exercise the right ant day during the Contract Life. European Option : Exercise the right only at the expiry date.

5. 55 v. Intrinsic Value (IV) and Time Value (TV) Net Asset value at Exit Rate i.e. the rate when we want to calculate the value is the Intinsic Value. Option Price can be broken into two parts i.e Intrinsic Value and Time Value. Option Price = Intrinsic Value + Time Value Quoted in marketCompare Spot Price of Underlying with the strike price of option to calculate Time Value. Balancing Figure

6. 66 vi. Moneyness of Option ITM ATM OTM In the Money At the Money Out the Money Compare Spot Price of the underlying with Strike Price of the option. Situation Call Option Put Option Spot Price > Strike Price ITM OTM Spot Price < Strike Price OTM ITM Spot Price = Strike price ATM ATM vii. Concept of Margin (security deposit) is applicable to option seller (because he has to meet his obligation)