A contract giving the holder the right, not the obligation, to buy (call) or sell (put) an asset at a set price. The seller receives a premium for taking on the obligation.
Where you will meet it
Option comes up in 76 learning outcome notes across the FRM syllabus.
A few of them:
Banks FRM Part I · Financial markets and products
“Shareholders then hold something like a call option on the bank's assets.”
The Building Blocks of Risk Management FRM Part I · Foundations of risk management
“A trader paid a share of profits but not charged for losses holds a payoff like a call option and gains from extra risk.”
Random Variables FRM Part I · Quantitative analysis
“And E[g(X)] is usually not g(E[X]) when g is nonlinear, as with option payoffs.”
Calculating and Applying VaR FRM Part I · Valuation and risk models
“The usual mistake is to call every derivative non-linear, or to think a delta-neutral option book is linear.”
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