Pin Risk

Posted in Finance, Accounting and Economics Terms, Total Reads: 21
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Definition: Pin Risk

Pin risk is the risk which arises when the expiration date or the date in which the option can be exercised comes close to end. The writer cannot hedge his risk precisely and he may end up in loss. In case the underlying asset on which the option contract is taken up closes very close to the strike price upon expiration, the option buyer will be at risk because the chance of the option buyer exercising his options may increase.

 

Options are a derivative which drives it value from the underlying asset. Options are a kind of derivative. An option give a right but not an obligation to the buyer to buy or the seller to sell at a pre-determined rate and before or on an expiration date. This price is also known as exercise price.

 

Example:

Mr X has written a call option contract with Mr Y. The exercised option price is 100 rs per unit and the expiration date is 2nd April, 2016. The price is closing up in an upward trend with an increase in Rs 2 per day. Suppose the price is close to 100 so the seller of the options will not be sure whether he should get his risk hedged or not. In case he does then at what price. Such situations may lead to loss.

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