Mohammed Arbounax Fraud risk.
x Misrepresentation risk.
x Ownership risk.
x Price risk.
x Market risk
x Commodity risk
x Default risk.7. Concept and Scope of Financial Options
7.1 Concept of Financial Options
In the language of modern economics, the financial option contracts
convey the right to buy or sell at a pre-determined and agreed price. There are
various types of financial options. However, all exchange-traded options
come in two types, namely call option and put option. A call option entitles
the holder the right but not the obligation to buy an asset at a pre-determined
exercise price in the future prior to or on the maturity. In contrast, a put
option entitles the holder the right but not the obligation to sell an asset at a
predetermined exercise price prior to or on the maturity.^13
7.2 Basic Features of Financial Options
From the above concept, one may summarize the basic features of
option contracts as follows:
a) the buyer of option pays as consideration a premium. However,
the buyer is not obliged to buy or to sell. This is a mere right that
may be exercised or otherwise, depending on whether the deal
for which the option is purchased is profitable. When the deal is
not profitable, the buyer declines to complete the contract and
loose the premium.
b) Both the seller and the buyer carry market risk.
c) The financial option practiced in the financial markets is an
independent contract from the sale contract. In other words,
both the option and the subject matter of the contract are priced
independently. The option gives a party a right to buy or sell. In