Option Premium Definition

Who pays the option premium. Option Premium – Everything You Need to Know | Stock Investor

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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. The premium is expressed in dollars per unit of currency.

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    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 who pays the option premium.

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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 exercising the option.

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    While the seller or the writer of a call or put option receives and keeps the premium, he has obligations toward the buyer of the option, if the buyer decides to exercise the option. 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.

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    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.