Called Away

Posted in Finance, Accounting and Economics Terms, Total Reads: 603

Definition: Called Away

It is a term used in an investment situation especially under options contract. In this scenario one party is obligated to deliver the underlying asset in the contract to the other party.

This happens in the following three situations:

1. Callable bond is redeemed or brought before maturity

A redeemable or callable bond has an entrenched call option in it. The company which issues these bonds has the option to redeem them or buy back before maturity. They are ‘called away’ from the buyer and sold back to the firm at a preset price when the firm exercises this right

Eg: when a company issues bonds or borrows in the bond market say 20 million at a coupon of 10% for a maturity period of 10 years. Let’s say the company believes the rate of interest to go down to 8% after 5 years. The company has the right to redeem or right to call the bond after 5 years, they can borrow at 8% from the bank and pay the bondholders.


2. When the call or the put option is exercised

Let’s consider a scenario when an investor buys 20 shares of ABC corporation for $10 per share. This investor want to sell the shares when it hits a price of $12 per share. Now this investor writes a covered call option with an exercise price of $12 per share. If the price of the share for the ABC Corporation increases more than $12, the buyer of this call option can call away the shares because it’s ‘in the money’ and the investor is obligated to adhere to the contract terms.


3. On a short sale, when delivery is required

Short sale refers to a scenario when the seller does not own the security but is obligated to repurchase it going forward. An investor borrows the underlying asset from a broker and sells it and then again he buys the same security to pay back the broker. This is done when an investor believes the prices of the underlying assets will fall in the future. The investor borrows at a higher price and buys back the underlying assets when the price falls and returns it to the broker, the difference in the price is his profit. This technique is commonly used in hedge funds.


In all the above cases mostly the owner of the call is at a disadvantageous position.


Hence, this concludes the definition of Called Away along with its overview.


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