Expiration date

Definition

The expiration date is the last date on which a financial derivative or option contract is valid. After this date, the contract becomes void and cannot be exercised or traded.

5 Must Know Facts For Your Next Test

1. Expiration dates are crucial in options trading as they determine the time frame for exercising the option.
2. The value of an option typically decreases as it approaches its expiration date, a phenomenon known as time decay.
3. In currency futures contracts, the expiration date affects the exchange rates at which currencies can be traded.
4. Financial managers must consider expiration dates to manage risk effectively and avoid potential losses.
5. Options that expire 'in-the-money' may be automatically exercised by brokers if not executed by the holder.

Review Questions

• Why is the expiration date important in options trading?
• How does time decay affect the value of an option as it nears its expiration date?
• What role does an expiration date play in managing financial risk?

Related terms

Option Contract: A financial derivative that gives the holder the right but not the obligation to buy or sell an asset at a specified price before a certain date.

Time Decay: The reduction in the value of an options contract as it approaches its expiration date.

Currency Futures: Standardized contracts to buy or sell a specific currency at a future date and at a predetermined price.