Back
Option-based derivatives
A family of derivatives essentially made up of options, e.g. embedded options, over-the-counter options, exchange-traded options and warrants, which give the holder the right, but not the obligation, to buy or sell a fixed amount or quantity of an underlying (for example a financial asset, an index or a commodity) at an agreed price on a specific future date or during a specific period, the option writer being bound by the holder's decision to exercise the option or not.
(1) Option-based derivatives differ from forward-based derivatives in that the writer is only required to buy or sell the underlying if the holder decides to exercise the option, as the holder has the right, but not the obligation, to buy or sell the underlying whereas, in the case of a forward-based derivative, each party is required to deliver or take delivery of the underlying.
(2) Some option contracts provide for cash settlement, for example when the underlying is an index.