From the course: Finance Foundations: Risk Management

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Financial solutions: Buyer options

Financial solutions: Buyer options

From the course: Finance Foundations: Risk Management

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Financial solutions: Buyer options

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- Everyone loves to have options. But when financial people talk about options, they're talking about financial contracts that give them the right but not the obligation to buy a commodity, currency, or interest rate at a specific price. People love options because they're relatively easy to understand, the cost to use them is clear and upfront, and they are effective tools to help individuals and companies manage financial market risks. Options allow companies to manage risks and foreign exchange rates, commodity prices, and interest rates. Options are a bit like corporate insurance for financial market risks because risk managers pay an upfront fee to buy options. But also like insurance, options don't always pay out. There are two kinds of options. Put options and call options. A put option pays for market falls. A call option pays if a market rises. All options have two parties. A buyer and a seller. They…

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