- 26 - price. For example, in a typical put option, the optionee is willing to pay a premium to the optionor for the right to sell a security to the optionor at an agreed price sometime in the future. If the market value of the security falls below the exercise price, the optionee can sell the security to the optionor at a price greater than its value on the exercise date. That potential opportunity is what the optionee paid for. Likewise, the premium received by the optionor is compensation for accepting the potential risk of having to purchase at an unfavorable price. If the market value of the security rises above the exercise price, the option will not be exercised, and the optionor keeps the option premium for having accepted the risk associated with uncertainty. The prior approval program involves an option to sell exercisable by an originator. An originator (optionee) can choose to enforce its rights to sell a mortgage to petitioner (optionor) at an agreed pricing formula but is under no legal obligation to do so. During the period when it can exercise its option to sell, the originator can choose between the agreed maximum yield for petitioner or, if interest rates fall, a lesser yield for petitioner. If interest rates rise above the agreedPage: Previous 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Next
Last modified: May 25, 2011