In finance, a bond option is an option to buy or sell a bond at a certain price on or before the option expiry date. These instruments are typically traded OTC.
- A European bond option is an option to buy or sell a bond at a certain date in future for a predetermined price.
- An American bond option is an option to buy or sell a bond on or before a certain date in future for a predetermined price.
Generally, one buys a call option on the bond if one believes that interest rates will fall, causing an increase in bond prices. Likewise, one buys the put option if one believes that the opposite will be the case. One result of trading in a bond option, is that the price of the underlying bond is "locked in" for the term of the contract, thereby reducing the credit risk associated with fluctuations in the bond price.
Read more about Bond Option: Valuation, Embedded Options, Relationship With Caps and Floors
Famous quotes containing the words bond and/or option:
“Man’s characteristic privilege is that the bond he accepts is not physical but moral; that is, social. He is governed not by a material environment brutally imposed on him, but by a conscience superior to his own, the superiority of which he feels. Because the greater, better part of his existence transcends the body, he escapes the body’s yoke, but is subject to that of society.”
—Emile Durkheim (1858–1917)
“You don’t merely give over your creativity to making a film—you give over your life! In theatre, by contrast, you live these two rather strange lives simultaneously; you have no option but to confront the mould on last night’s washing-up.”
—Daniel Day Lewis (b. 1957)