Question 5

Options are perceived as a new financial product by many, but like forwards, they were used

several hundred years ago in trading during ancient civilizations. Now, with their usage in the

over-the-counter (OTC) and derivatives market in Europe, the United Kingdom, the United

States and later in Asian markets, options cannot be considered new financial instrument but

have long played a big role in the economy.

a) Why do you consider that an option is more flexible instrument in your strategic financial

planning? (4 Marks)

b) Differentiate between at-the-money compared to in-the-money and out-of-money in an

options trade. (6 Marks)