Interest Rate Options Definition

[Interest Rate Options Definition]

The interest rate option is an options contract in which a fixed rate of interest is paid at a specified price and future date. They are also called debt options or fixed income options.

[Interest Rate Call Option Definition]

This type of options can be used in periodic payment situations or balloon payment situations.

[Inflation Swap Definition]

In an inflation swap, there are two parties to the deal. One party transfers the inflation risk, and the other party assumes the inflation risk. One party's assets are linked to a price index and the other party's assets linked to cash flow (which could be fixed or floating).

[Index Option Definition]

Traders who do not find it comfortable trading stocks in the options market can decide to trade the performance of a group of options measured by an index. These options are known as index options.

[Indemnification Method Definition]

It compels the responsible counterparty to reimburse the non-responsible counterparty for all losses and damages that were brought about by the premature termination of the swap.

[Illiquid Option Definition]

Illiquid options are difficult to sell because they are far away from their expiration dates and as such when they are sold, they are sold at a huge discount.

[Horizontal Spread Definition]

Also called a calendar spread, this option strategy hopes to take advantage of different moves of the asset at various times. For instance, an asset may be bearish at a certain time, and then bullish thereafter. By using a calendar spread, the trader can benefit from the different conditions for the asset as a result of the different expiry times set for the two sets of options trades.

[Horizontal Skew Definition]

Horizontal skews can either be forward skews when volatility increases from near to far months or, reverse skews when volatility decreases from near to far months.

[Hedging Transaction Definition]

Options trades are commonly used as hedging transactions to protect trades in the parent markets of the assets traded. Typically, the trade used as a hedge goes in an opposite direction so that a loss in the parent market on that asset will translate into a profit on the trade used as the hedge, cutting down any losses sustained.

[Gut Spread Definition]

Investors who enter into this type of position, have the expectation that the option will expire worthless and thereby receive a large up front premium.

[Greeks Definition]

The Greeks which include gamma, vega, delta, rho, and theta, are often used for dynamic hedging. Of all these, only Vega does not have a Greek alphabet assigned to it.

[Grantor Definition]

Some options pay the option writer a premium on writing the option. This is why some traders prefer to become option writers or grantors.

[Globally Floored Contract Definition]

While a globally floored contract helps the investor recover some of his initial investment in the options contract, activating the use of a globally floored function will prevent the trader from receiving the maximum payout if the trade ends up a winner.

[Gamma Pricing Model Definition]

The Black-Scholes option pricing model is an example of a gamma pricing model.

[Gamma Definition]

Gamma is used as a measure of the inherent volatility of an asset. A very volatile option contract implies a large gamma. A small gamma therefore implies an asset with low inherent volatility.

[Furthest Out Definition]

Bid and ask spreads on contracts of this kind tend to be rather wide because of the illiquidity of such contracts.

[Fungibles Definition]

"These are assets that are easily exchangeable and tradable. Commodities, common shares of the same company, and currencies are all examples of fungibles.

 

 

"

[Fugit Definition]

Created by Professor Mark Garman in 1989, it represents the optimal date with which to exercise an American option.

[Frontspread Definition]

Also known as ratio vertical spread, the frontspread is used by professional traders when they believe that the asset will make a calculated upward move. It is a risky strategy because loss potential is unlimited but profit potential is limited.

[Front Fee Definition]

In simple language, the front fee is the cost of acquiring a compound option. Usually a second front fee is made when the option is eventually exercised.

[Forward Start Option Definition]

Even though the option is an advance trade, the premium for the trade is usually paid in advance. In addition, the expiration time is usually set at the time the forward start option is purchased.

[Formula Method Definition]

The formula method is used to calculate what compensation will be paid to the party that was not responsible for the early termination of the swap contract. Used in calculating compensation to one party in a currency swap deal.

[FMAN Definition]

Option cycles are commonly used to determine the expiration dates of options contracts, and the FMAN months represent one of the cycles used in doing this.

[Flexible Exchange Option - FLEX Definition]

Created in 1993 by the Chicago Board Options Exchange (CBOE), FLEX options provide investors with the opportunity to trade expanded position limits.

[Fiduciary Call Definition]

"When a trader purchases an optionb with a fixed expiry, the present value of the strike price is invested in an interest yielding account with very low risk. On maturity, this investment can then offset the costs of exercising the initial option if the holder decides to do so.

 

"