Aug 292020
 

Participating options (the same as Participating Forwards, which is a somewhat confusing term) are options whereby the holder receives only some of the benefit (not all of it) if the option is not exercised. He will ‘participate’ in beneficial price or rate moves whilst being protected from adverse moves. Participating Forwards are cheaper than Vanilla Options (because the latter benefit from all of the upside, minus the premium cost). Participating option hedges involve buying a put and selling a call with the same strike but in different proportions. e.g. a German corporate which is long $ (i.e. will receive $) can buy a $ put and sell a $ call (in different proportions) to ‘participate’ in any upside whilst protecting the downside. The structure can be made to be zero cost. Also can be used to refer to participating caps, where only a certain percentage of the gain in rates rising above the strike is received by the buyer. See Options, Caps

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