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Infinance, acall option (often simply a "call"), is acontract between the buyer and the seller of the calloption to exchange asecurity at a setprice.[1] The buyer of the call option has the right, but not the obligation, to buy an agreed quantity of a particularcommodity orfinancial instrument (theunderlying) from the seller of the option at or before a certain time (theexpiration date) for a certain price (thestrike price). This effectively gives the buyer along position in the given asset.[2] The seller (or "writer") is obliged to sell the commodity or financial instrument to the buyer if the buyer so decides. This effectively gives the seller ashort position in the given asset. The buyer pays a fee (called apremium) for this right. The term "call" comes from the fact that the owner has the right to "call the stock away" from the seller.
Option values vary with the value of the underlying instrument over time. The price of the call contract must act as a proxy response for the valuation of:
The call contract price generally will be higher when the contract has more time to expire (except in cases when a significantdividend is present) and when the underlying financial instrument shows morevolatility or other unpredictability. Determining this value is one of the central functions offinancial mathematics. The most common method used is theBlack–Scholes model, which provides an estimate of the price of European-style options.[4]
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