Key features of an option contract:

The key features are: Exercise price, expiration date and time to expiration. The exercise price is also called the fixed price, strike price or just the strike and is determined at the beginning of the transaction. It is the fixed price at which the holder of the call or put can buy or sell the underlying asset. Exercising is using this right the option grants you to buy or sell the underlying asset. The seller may have a potential commitment to buy or sell the asset if the buyer exercises his right on the option.

The expiration date is the final date that the option holder has to exercise her right to buy or sell the underlying asset.

Time to expiration is the amount of time from the purchase of the option until the expiration date. At expiration, the call holder will pay the exercise price and receive the underlying securities (or an equivalent cash settlement) if the option expires in the money. The call seller will deliver the securities at the exercise price and receive the cash value of those securities or receive equivalent cash settlement in lieu of delivering the securities.

Defaults on options work the same way as they do with forward contracts. Defaults on over-the counter option transactions are based on counterparties, while exchange-traded options use a clearing house.

Difference between a put option and call option:

An option is a contract between two parties where one party gives the other a right but not an obligation to either buy or sell a particular asset at a pre-defined price that is mentioned in the option. The asset that can be bought or sold according to the terms of the option is called the underlying instrument and the price is called strike price.

A put option is the right to sell the underlying instrument and a call option is the right to buy the underlying instrument. So if the person buying the option expects the price of the underlying instrument to fall he would buy a put option and if he expects the price of the underlying instrument to rise he would buy a call option.

Difference between an American option and a European option:

An option style refers to whether the option contract can be exercised before the expiration date or not. European options cannot be exercised before the expiration date of the option contract. American options can be exercised by the option holder (the option buyer) any time during the life of the contract.

For example, say you have an option contract that expires in six months, however, after two months it is already showing a large unrealized profit.

American-style options give the trader the ability to exercise his or her option at any point in time up to the expiration date. The European option allows the trader to only exercise his or her

option exactly on the date the option expires. The difference between the two is small, but important enough to make a difference on an investor's timing abilities.

Why does an option writer need to post margin?An option writer needs to post margin because he takes the risk that the buyer may exercise his option.

Difference between Exchange-traded options & OTC options:In Exchange-traded options, all terms are standardized except price. Usually have short-term expirations (one to six months out in duration),. The exchange establishes expiration date and expiration prices as well as minimum price quotation unit. The exchange also establishes whether the option is American or European, its contract size and whether settlement is in cash or in the underlying security.

OTC options are customized, and thus are more costly and not very liquid. But many financial institutions use options to hedge their positions rather than for purposes of speculation or trading. They thus tend to hold options until expiration.

Options buyers have no obligation to perform. Options buyers pay premiums vs. margins for futures. Maximum loss to buyer is premium, and thus there is asymmetric risk.Options buyers

Have no obligation to perform. Pay premiums vs. margins for futures. Maximum loss to buyer is premium, and thus there is asymmetric risk.

Difference between options and futures:The main fundamental difference between options and futures lies in the obligations they put on their buyers and sellers. An option gives the buyer the right, but not the obligation to buy (or sell) a certain asset at a specific price at any time during the life of the contract. A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date, unless the holder's position is closed prior to expiration.

Aside from commissions, an investor can enter into a futures contract with no upfront cost whereas buying an options position does require the payment of a premium. Compared to the absence of upfont costs of futures, the option premium can be seen as the fee paid for the privilege of not being obligated to buy the underlying in the event of an adverse shift in prices. The premium is the maximum that a purchaser of an option can lose. 

b. Options and futures are labeled as derivative because their price is based on the price of the underlying assts.

7) In case of long option, the buyer of the option has the right to exercise the option but not an obligation. So the profit for the long is unlimited if the spot price rises but the loss is fixed and minimum which is the premium paid upfront. 8) When spot price = $25

Profit/loss =25-70-2 = (47)

In this case long will not exercise the option and the loss will be $2

1) When spot price = $70

Profit/loss =70-70-2 = (2)

2) When spot price = $100

Profit/loss =100-70-2 = 28

3) When spot price = $400

Profit/loss=400-70-2 = 328

9) There is a profit of $2 at $25 and $70. There is a loss of $28 at $100, and $328 at $400.

10) I disagree because if the prices rise the short seller is at risk to purchase the underlying asset

at a higher price. Secondly, the short seller may have to collateral his money.

11) Due to difficulty in arranging the underlying stocks and transaction costs.

12)

Money the writer pay = S-E

= 240-200

= 40*100

= 4000

Profit/loss = S-E-P

= 240-200-5.50

= 34.5*100

= 3450

13) Gain is =7

14) The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.

b. the incentive for the investor is the opportunity of profit by arbitrage without additional risk and investment.

15) It is because when you will not have to pay for an asset as opposed to the option, you would be more interested to buy such option.

16) Use of swaps for assts/liability management and ration of new securities through swaps.

17) By swap reversal, by swap sale and by swap buy-back or close-out sale.