123ArticleOnline Logo
Welcome to 123ArticleOnline.com!

ALL >> Education >> View Article

Introducing Derivatives : Futures And Options

By Author: Artham Vidya
Total Articles: 24

Forward contracts, we have explained in our previous segment, are used to reduce the risk from adverse price movements in financial assets and commodities.

When you lock-in the prices, you are protecting yourself from losses arising from price volatilities in prices of assets.

The most common derivatives contracts (which are traded on the exchanges) are futures, options and swaps. We will deal with futures and options first.

Derivatives are mainly used by three categories of participants in the financial (including currency) and commodities markets. They are hedgers, speculators and arbitrageurs.

Hedgers, as stated earlier, seek to eliminate risk associated with the swing in the prices of an asset.

Speculators try to anticipate the swing in prices of assets in the future and take positions accordingly in the derivatives market.

Arbitrageurs take advantage of the price differentials in the derivatives and futures segment and take offsetting positions in the two segments to make profits.

All three types of participants are responsible for the liquidity of the derivatives segment, pricing and the direction in which futures and options move.

Futures: These are standardised forward contracts. So if you want to reduce the risk in your portfolio of assets – stocks, commodities, precious metals – then instead of searching around for another party to enter into a contract, you just need to buy the ready-made, required futures contract through an exchange.

The following items are standardised in a futures contract:
•The quantity of the underlying asset.
•The quality of the underlying asset.
•The date on which the delivery of underlying asset takes place.
•The pricing of the contract and the minimum price change.

Options: In an options contract, the buyer (of the option) gets the right but not the obligation to buy or sell an asset at a predetermined price at or before a future specified date.

The option holder may decide to exercise the option of buying or selling only if the price moves favourably for him. So though he has the right, he may chose not to do it, so he is not obliged to exercise the option.

The main difference between a futures and options contract lies in the obligation of the purchaser. In a futures contract both parties are obliged to stick to the terms of the contract.

Total Views: 50Word Count: 379See All articles From Author

Education Articles

1. Bangladesh Institute Of Information Technology
Author: imrul

2. Which Are The Best Applications And Areas Of Photogrammetry
Author: NIBT

3. What Is Directory Submission In Seo In Off Page Submissions
Author: indra sena

4. Education, Software, Programming
Author: Gurung Tech

5. Synture Group Tips For Success
Author: Mrs. Manushree Soni

6. University Course From India
Author: Miya John

7. Top 9 Trends On Ios App Development
Author: infocampus

8. Inquiries And Answers For A Ui Design Interview:
Author: Infocampus Logics Pvt Ltd

9. Want A Terrific Cdr Report To Excite Ea Australia? Choose Us.
Author: Dan Smith

10. Know The Importance Of Smartplant 3d Online Training
Author: Multisoft Virtual Academy

11. Gk - Eleventh Schedule (article 243f)
Author: gkexam

12. How To Learn Basics Of Android?
Author: LearnVern

13. Online Homework Help Services From Academic Professionals At Your Convenience!
Author: Mely Jess

14. Clat Coaching In Chandigarh
Author: gyan sagar institute

15. Best Test Taking Strategies
Author: Great lake

Login To Account
Login Email:
Forgot Password?
New User?
Sign Up Newsletter
Email Address: