# Option rate

In finance , a price premium is paid or received for purchasing or selling options. This price can be split into two components. The intrinsic value is the difference between the underlying spot price and the strike price, to the extent that this is in favor of the option holder. For a call option , the option is in-the-money if the underlying spot price is higher than the strike price; then the intrinsic value is the underlying price minus the strike price.

For a put option , the option is in-the-money if the strike price is higher than the underlying spot price; then the intrinsic value is the strike price minus the underlying spot price. Otherwise the intrinsic value is zero. The option premium is always greater than the intrinsic value. This is called the Time value. Time value is the amount the option trader is paying for a contract above its intrinsic value, with the belief that prior to expiration the contract value will increase because of a favourable change in the price of the underlying asset.

The longer the length of time until the expiry of the contract, the greater the time value. There are many factors which affect option premium. These factors affect the premium of the option with varying intensity. Some of these factors are listed here:. Apart from above, other factors like bond yield or interest rate also affect the premium. This is because the money invested by the seller can earn this risk free income in any case and hence while selling option; he has to earn more than this because of higher risk he is taking.

Because the values of option contracts depend on a number of different variables in addition to the value of the underlying asset, they are complex to value.

A put gives the bearer the right, but not the obligation, to profit from a decrease in interest rates. The exchange of these interest rate derivatives are monitored and facilitated by a central exchange such as those operated by CME Group. From Wikipedia, the free encyclopedia. This article does not cite any sources. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. December Learn how and when to remove this template message.

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