A derivative with a convex payoff-profile at some point before the option's maturity is a simple plan vanilla option. As the option becomes progressively more-in-the money, the rate at which the position makes money increases until a sympathetically approaches the linear payoff of the future. Similarly, as the option becomes progressively more out-of - the money, the rate at which the position loses money decreases until that rate becomes zero. This is an example of:

Question

Quizplus · Accepted Answer

A non-linear derivative, such as an option, has a convex payoff profile where the rate of profit or loss changes non-linearly as the underlying asset's price changes.

A Derivative with a Convex Payoff-Profile at Some Point Before