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Hi Mr. Moffat,
Referring to the lecture video part 5 of the above topic, could you please clarify me how can we “sell a call option” to a depositor without buying it first from a dealer? And don’t we incur premium costs on that?
No. If I sell you a call option then it is as though I am the dealer.
You pay me a premium and I give you the right to buy something at a fixed price on a future date. If the actual price on the future date is lower than the exercise price you don’t exercise the option and that is the end of it.
If the actual price on the future date is higher than the exercise price then you do exercise the option and I then have to pay you the difference.I assume that you have watched the earlier lectures on share options and on foreign exchange options – it is the same principle for all of them.
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