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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.
A cliquet option or ratchet option is an exotic option consisting of a series of consecutive forward start options. [1] The first is active immediately. The second becomes active when the first expires, etc. Each option is struck at-the-money when it becomes active. [2]
A delta one product is a derivative with a linear, symmetric payoff profile. That is, a derivative that is not an option or a product with embedded options. Examples of delta one products are Exchange-traded funds, equity swaps, custom baskets, linear certificates, futures, forwards, exchange-traded notes, trackers, and Forward rate agreements.
Option values vary with the value of the underlying instrument over time. The price of the call contract must act as a proxy response for the valuation of: the expected intrinsic value of the option, defined as the expected value of the difference between the strike price and the market value, i.e., max[S−X, 0]. [3]
The strike price X basket is usually set at the current value of the basket (at-the-money), and the payoff profile will be max(S basket − X basket, 0) where S basket is a weighted average of n asset prices at maturity, and each weight represents the percentage of total investment in that asset.
The payoff of the call option on the futures contract is (, ()). We can consider this an exchange (Margrabe) option by considering the first asset to be e − r ( T − t ) F ( t ) {\displaystyle e^{-r(T-t)}F(t)} and the second asset to be K {\displaystyle K} riskless bonds paying off $1 at time T {\displaystyle T} .
Long 1 call with a strike price of (X − a) Short 2 calls with a strike price of X; Long 1 call with a strike price of (X + a) where X = the spot price (i.e. current market price of underlying) and a > 0. Using put–call parity a long butterfly can also be created as follows: Long 1 put with a strike price of (X + a) Short 2 puts with a ...
A long condor consists of four options of the same type (all calls or all puts). [1] The options at the outer strikes are bought and the inner strikes are sold (and the reverse is done for a short condor). [1] The difference between the two lowest strikes must be the same as the difference between the two highest strikes. [1]
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