Interest Rate Option

An interest rate option provides a way to manage interest rate risk. If you are a buyer, you get the right to pay (for a maximum interest rate), or to receive (for a minimum interest rate) at a predetermined strike price or interest rate for a set period. If the interest rate goes against you, then the option will compensate. If the interest rate goes in your favour, then the option expires worthless. The option makes payment to compensate for a change.

If you are the writer of an interest rate option, then it is your obligation to make up the difference between the prevailing interest rate and the strike price agreed to, so that the buyer receives the interest rate contracted.

Binary Options

Not as complex as the regular options, but included here because of the name, binary options are really just a form of betting. There are two outcomes to a binary option, either you win and get paid a set amount, or you lose and get nothing. For this reason binary options are often referred to as all-or-nothing options.

Binary options only require that you have an opinion of whether the market is going up or down, and the degree does not count. Typically they are traded on a very short time span, sometimes just hours, and usually not more than a day or two.

The dealer makes an assessment of the likelihood of the index or major stock going up or down, and sets the payouts appropriately. You place your bet, and either you get paid a set amount, or get nothing. The stakes for betting upwards and betting downwards total to more than the payout – at least one is bound to cost more than half the payout amount. This is how the option dealer makes a profit on the binary option.

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