Compound Options

Compound Options

Compound Options  (Words<500)

A compound option is an option on another option. A split-free or compound option is an option for which an underlying asset is an option.  Compound options have two strike prices and two expiry dates and also two premiums if the option is exercised. Compound Option provides the owner with the right to buy or sell another option. The first option is called overlying and the second option is called underlying. Compound options can be of any combination of Calls & Puts. (more…)
Black-Scholes-Merton Model

Black-Scholes-Merton Model

Black-Scholes-Merton Model

The Black-Scholes-Merton model is a differential equation used to solve for option prices. The Black-Scholes-Merton model won a noble prize in economics. The standard BSM model is only used to price European options as it does not take into account American options because they can be exercised before maturity. (more…)
Effective Duration

Effective Duration

Effective Duration (Words <500)

The duration calculation for bonds that have embedded options is known as effective duration. It helps in evaluating the price sensitivity of hybrid security to change the benchmark yield curve. This measure of duration takes into consideration the fact that expected cash flows will fluctuate as interest rate changes and therefore is a measure of risk. (more…)

Chooser Option

Chooser Option

Chooser Option

An option contract that allows the holder to decide the nature of the option i.e., whether the option is a call or put before the expiry date is called a Chooser Option. It is an option contract where the holder may choose at some point during the life of the option whether the option is a call or a put. These options have the same strike price and expiry date regardless of it being a call or a put. (more…)
Downside Risk

Downside Risk

Downside Risk

Risk is the uncertainty of losing money invested in a security. To measure the risk or volatility of security we use Standard deviation. Standard deviation measures risk based on returns of security that are positive as well as negative. Therefore Standard deviation measures upside risk as well as downside risk.  As there is a risk and return trade-off, we say an investor should be compensated in terms of returns for the risk that he takes. But why would an investor be paid for the upside deviation, an investor should be worried about the downside deviation(risk)? (more…)
Vega in Options Trading

Vega in Options Trading

Vega in Options Trading

Vega is the Greek that measures the sensitivity of an option to implied volatility; denoted by the Greek letters. It is the change in the options price for a one-point change in implied volatility. Traders usually refer to the volatility without the decimal point. Options Vega denotes the option’s price sensitivity to changes in the volatility of the underlying asset. It measures how much the option’s price changes in response to a 1% change in the implied volatility of the underlying asset. This article aims to provide an overview of Vega in Options Trading. (more…)
Foreign Exchange Swap

Foreign Exchange Swap

Foreign Exchange Swap

In 1981, the US-based company IBM and the world bank Initially enter the Foreign Exchange swap agreement with different currencies. Now the Fx Swaps are the highest trading in the forex market and continue their profits in the market share. Speculators are also used the Fx Swaps. (more…)
EQUITY DERIVATIVE

Equity Derivatives

EQUITY DERIVATIVE

An equity derivative is a type of financial instrument. The value of an equity derivative is derived from the price movement of an underlying asset. Investors use equity derivatives to speculate or hedge against the downside of their investment. The hedge to mitigate the risk associated with taking a long position or short position. Equity option and equity index futures are two forms of equity derivatives. A stock option is a good example of an equity derivative because the value of the stock option is based on the price movements of the underlying stock. (more…)
Synthetic Options

Synthetic Options

Synthetic Options

Options offer a very low-cost method to invest in with less capital, whether in currencies, trading futures, want to buy shares of a corporation. Options are the most common way to make profits from market swings. Synthetic options generally minimize problems as compared to vanilla options because generally synthetic options are less affected by problems of options. Volatility, decay, and strike price play a less important role in its ultimate outcome. (more…)
Asian options- Benefits and Risks

Asian options- Benefits and Risks

Asian options-Benefits and Risks

An Asian option is an option type where the payoff depends on the average price of the underlying asset over a certain period as opposed to standard options where the payoff depends on the price of the underlying asset at a specific point in time that is maturity. (more…)