"Option": 1. A financial option is a derivative instrument giving the holder the right - but not the obligation - to buy or sell an underlying asset on or before a future date at a specified price. Options are more commonly ‘cash settled’ by paying or receiving a net cash amount, rather than being settled by physical delivery of the underlying asset. Like other derivative instruments, options can be used to: • Speculate by creating new exposures to market rates. • Hedge existing exposures to changes in market rates. • Arbitrage in combination with other related instruments to achieve 'risk free' profits. When used for hedging purposes, options generally provide insurance-like protection against worst case outcomes. (Contrasted with 'fixing' hedging instruments - such as FRAs - which effectively fix the market rate being hedged.) 2. More generally, choice. 3. A real option is an option relating to an operational decision or outcome.
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