A financial derivative in the form of a conditional forward transaction, i.e. a contract which – for the buyer (holder) contains the right, but not the obligation, – either on or by a specified date (expiration date), – to buy (call option) or – to sell (put option) a certain quantity of a precisely specified underlying asset (financial product, commodity) – at a strike price fixed in advance. – For the option right, the buyer pays the seller a certain sum, the option premium, when the transaction is concluded. The seller of the option is called the option writer because he must, as it were, hold still and wait until or even if the buyer makes use of his right or allows it to expire. The put option thus shifts the risk to the writer. – Only one party to the contract, namely the buyer, has the right to demand performance. If the buyer exercises his right, the seller must fulfill his obligation at the agreed strike price regardless of the current market price. He thus bears what may be a high risk, against which he must generally hedge. – Possible underlying assets of an option are – assets such as shares, bonds, commodities, goods and precious metals, – reference rates such as currencies, interest rates, indices, – derivatives or – any combination thereof. – A purchase right (right to acquire a property) under section 496 of the German Civil Code. – See abandonment, hedging relationship, settlement department, complex option, contract for difference, settlement, European Master Agreement, financialization, financial instrument, index option, credit risk, delivery, physical, money-back warrant, Murabaha, option, naked, option value, OTC option, rainbow option, commodity futures contract, roll mix, banking, salam, indemnity liability, sleepy warrant, writer, spread, standard option, time spread, tubos, availability premium, replacement risk, forward contract, forward speculator. – Cf. the definitions in the ECB’s Monthly Bulletin of May 2000, p. 42.
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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