Options Premium

Th option is a premium

  • Premiums are quoted on a per-share basis because most option contracts represent shares of the underlying stock.
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The buyer of the call or put option has the right but not obligation to buy or sell currency, respectively. Therefore, the premium is the price of having a choice.

  • Also known simply as option price.
  • Option premiums explained Option premiums explained When you buy an option, you pay a premium for the right to trade at a set price within a predetermined time.
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The premium is expressed in dollars per unit of currency. Now you know why the premium is called the option price: you pay the premium upfront when you get a call or put option. You can look at the premium as a sunk cost a cost that already incurred and cannot be recoveredespecially when exercising or not exercising your right to buy or sell currency.

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However, as some of the upcoming numerical exercises will show that, especially in speculation, the premium is not a sunk cost when it comes to calculating your profit or payoff. When you read about, for example, the premium of a call option being 3.

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The valuation of an option is mathematically complex. A number of variables, such as the forward rate, the current spot rate, the strike price, the time to maturity, the volatility of currencies, and the home and foreign interest rates are included in the valuation of foreign exchange options.

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The table summarizes the characteristics of foreign exchange options. The buyer or the holder of a call or put option pays the premium for having a choice between exercising and not standard options the option. While the seller or the writer of a call or put option receives and keeps the premium, he has obligations toward the th option is a premium of the option, if the buyer decides to exercise the option.

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In the case of a call option, these obligations imply that, once the buyer decides to exercise the option, the writer has to sell to the buyer of the call option a specified amount of currency at the specified strike price. In the case of a put option, once the buyer decides to exercise the option, the writer has to buy from the buyer of the put option a specified amount of currency at the specified strike price.