RSM333H1 Chapter Notes - Chapter 12: Call Option, Risk-Free Interest Rate, Put Option
Document Summary
Call option the right, but not the obligation, to buy an underlying asset at a fixed price for a specified time. Exercise price/strike price the price at which an investor can buy the underlying asset. Exercise to implement the rights of options to buying or selling. Expiration date the last date on which options can be converted or exercised. Payoff the proceeds that would be generated from the option if today was the expiration date. The payoff doesn"t exactly reflect the investor"s profits because it does not account for the purchase price of the option. For a payoff in a long position: the payoff is a 45 degree angle going through the origin (linear payoff, the value varies one to one with the price of the underlying asset. If an investor buys the asset forward, they have a long position. If the asset price > forward price the investor has a profit.
