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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 agreed
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