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Derivatives, Futures & Options

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Derivatives, Futures & Options

Physical Settlement

Settlement of a derivative by actual delivery of the underlying security against payment, rather than by cash difference.

Test: at expiry, an in-the-money contract obliges delivery of Lot Size units against payment of Strike x Lot Size qualitative
Derivatives, Futures & Options

Protective Put

Buying a put against shares already owned, to place a floor under the holding's value.

Maximum Loss = (Purchase Price - Strike + Premium) x Lot Size; Break-even = Purchase Price + Premium
Derivatives, Futures & Options

Put Option

An option giving its buyer the right to sell the underlying at the strike price on or before expiry.

Payoff at expiry for the buyer = max(Strike - Spot, 0) - Premium Paid
Derivatives, Futures & Options

Put-Call Parity

The relationship fixing the price of a European call and put with the same strike and expiry relative to the underlying.

Call Price - Put Price = Spot Price - Present Value of Strike