|
(1) A risk/return pattern characteristic of options that limits (or insures against) price or rate movements through a predetermined (strike) price or rate in exchange for the explicit or implicit payment of an option (insurance) premium. (2) The component of an option or of a more complex instrument that provides this risk limitation feature. In contrast to a straight hedging transaction which eliminates risk symmetrically over all price ranges, an insurance position creates an asymmetric risk-return pattern. See also Fair Value of and Option, Volatility Value. (3) An arrangement under which one party to a contract (the insurer) in return for a consideration (the premium) indemnifies another party (the insured) against a specific loss, damage or liability arising from specified uncertain events.
|
