For a derivative, it refers to a situation where it does not make a payoff to the holder.
A call option would be out of the money (out-of-the-money call) when the strike price of the call is higher than the market price of the underlying security/ asset. For a put option, this situation (out-of-the-money put) arises when the strike price of the put is lower than the market price of the underlying security/ asset. An out-of-the-money option is often known as underwater option.
In a similar manner, a swap is said to be out of the money (i.e., out-of-the-money swap), the present value of the net fixed-rate payments exceeds the net present value of the net floating-rate receipts from the perspective of a fixed-rate payer.
Comments