Definition of Privilege

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TeachMeFinance.com - explain Privilege




historic definition...

Privilege -- A general name for a call, put, spread or straddle, information as to each of which is furnished under its own title. There can be no loss to the buyer of a privilege beyond the amount paid for it. Privileges are legal and are enforceable as contracts, but they are not recognized by the New York Stock Exchange. Privileges are often bought as a protection against loss on transactions in the stock market. Illustration : One hundred shares of stock are bought at 100. A put under which the stock can be delivered at 98 is purchased for 1 per cent, which makes the net price of the put 97. Then, if the stock goes down to, say, 94 the stock owned by the holder of the put can be put (delivered) to the issuer of the put at 98 so that the net loss is only 3 per cent instead of 6 per cent as would be the case if no put had been bought and the stock had to be sold at 94. On the other hand, should the stock go up to, say, 106 only the cost of the put, 1 per cent, would have to be deducted from the profit on the stock. In the case of a stock sold short a call would be employed for protection against loss. If the stock were sold short at loo and if a call at 102 were purchased for 1 per cent and the stock advanced to 106 the net loss would be only 3 per cent, as against 6 per cent if no call had been purchased and the stock had to be covered (bought back) at 106. If the stocK against which the put was bought went down to 94 only a deduction of 1 per cent, the cost of the put, would have to be made from the profit on the stock. Calls and puts on grain are based on the same general principles as those on stocks , but they are not employed to any extent except to limit loss. In some states puts and calls on grain are illegal.



About the author

Mark McCracken

Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".


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