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Options I

In: Capital Market Instruments

Author

Listed:
  • Moorad Choudhry

    (Europe Arad Bank plc)

  • Didier Joannas

    (Thomson Reuters-Risk in North Asia)

  • Gino Landuyt

    (Europe Arad Bank plc)

  • Richard Pereira
  • Rod Pienaar

    (UBS AG prime services)

Abstract

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.

Suggested Citation

  • Moorad Choudhry & Didier Joannas & Gino Landuyt & Richard Pereira & Rod Pienaar, 2010. "Options I," Palgrave Macmillan Books, in: Capital Market Instruments, edition 0, chapter 17, pages 341-350, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-27938-4_17
    DOI: 10.1057/9780230279384_17
    as

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