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Continuing on the example above, suppose now that the initial price of Alice's house is $100,000 and that Bob enters into a forward contract to buy the house one year from today. But since Alice knows that she can immediately sell for $100,000 and place the proceeds in the bank, she wants to be compensated for the delayed sale.
For example, for bond options [3] the underlying is a bond, but the source of uncertainty is the annualized interest rate (i.e. the short rate). Here, for each randomly generated yield curve we observe a different resultant bond price on the option's exercise date; this bond price is then the input for the determination of the option's payoff.
An Asian option (or average option) is an option where the payoff is not determined by the underlying price at maturity but by the average underlying price over some pre-set period of time. For example, an Asian call option might pay MAX(DAILY_AVERAGE_OVER_LAST_THREE_MONTHS(S) − K, 0). [4]
The second year's payoff has the same payoff as a one-year option, but with the strike price equal to the stock price at the end of the first year. The third year's payoff has the same payoff as a one-year option, but with the strike price equal to the stock price at the end of the second year.
For example, a GBPUSD contract could give the owner the right to sell £1,000,000 and buy $2,000,000 on December 31. In this case the pre-agreed exchange rate, or strike price, is 2.0000 USD per GBP (or GBP/USD 2.00 as it is typically quoted) and the notional amounts (notionals) are £1,000,000 and $2,000,000.
For Asian options, the payoff is determined by the average underlying price over some pre-set period of time. This is different from the case of the usual European option and American option , where the payoff of the option contract depends on the price of the underlying instrument at exercise; Asian options are thus one of the basic forms of ...
The payoff depends on the optimal (maximum or minimum) underlying asset's price occurring over the life of the option. The option allows the holder to "look back" over time to determine the payoff. There exist two kinds of lookback options: with floating strike and with fixed strike.
The condor is so named because of its payoff diagram's perceived resemblance to a large bird such as a condor. [ 6 ] An iron condor is a strategy which replicates the payoff of a short condor, but with a different combination of options.