Options as Derivatives

Options are derivatives with a one-sided payoff: the buyer has a right, not an obligation. Here is how options differ from forwards and futures, how they are priced and how they fit in the derivatives family.

Asymmetric payoffs

Forwards and futures have symmetric payoffs: each dollar the price moves helps one side and hurts the other equally, and both are obligated. Options are asymmetric: the buyer pays a premium for a right and can walk away, so the buyer’s loss is capped while the seller’s obligation remains.

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