In financial markets
are a class of derivative
allowing the optional
purchase or sale of an underlying
Another term sometimes used for an option is contingent claim
, reflecting a non deterministic possibilities since the owner of the option is not necessarily obliged
to buy or sell the underlying.
Options typically will fall into on of two distinct categories of complexity - vanilla or exotic.
These two classes are differentiated by the intricacies associated with valuation
; that is, how a fair market price for such a derivative instrument is determined.
Vanilla options are the simpler of the two.
s, on the other hand, are sometimes referred to as toxic waste
by Investment Banker
s due to the subtle - and at times dangerous - aspects associated with valuation.