Future and Options Are Derivatives Basic

8/3/2019 Future and Options Are Derivatives Basic

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future and options are derivatives

agreetments between two parties which will give right to buy/sell a product at an agreed

price on a future date and agreed quantity. these f & o products ensures minimisation of

risk of price of underlying asset. like if u r facing the price risk of an equity that u hold u can

enter into future or option to overcome such risk

Author:fathimathabasum 11 Apr 2009 Member Level:Gold Points :

10 (Rs 10) Voting Score:0

Futures and options are financial derivatives.

Derivatives are financial instruments which do not have any intrinsic value.They are

contracts which derive their value from something else may be from underlying asset,index

rate,reference rate etc.They are financial tools that helps to meet specific risk management

objectives and improve cash flow management functions.

Financial derivatives can be any one of these or combination of these:-

-Options

-Forward Contracts

-Futures

-Swaps

Options: It is a right (but not an obligation) to buy or sell an underlying asset or

security,during a given period of time at a specific price.

-Call option- It is an option to buy-Put option- It is an option to sell

-Covered option- If a contract is backed by underlying asset then it is called covered option

-Naked Option - If a contract is not backed up by underlying asset then it is Naked option

-Cap- It is an option which fixes a maximum interest rate payable on loan for a series of

interest periods.

Forward Contracts:It is an obligation to buy or sell on specific date in the future The price

for the underlying asset is agreed when the contract is made.Future contracts are generally

traded in OTC.

Futures:

Futures are similar to Forward contracts but they are traded on Stock Exchange.They are

valued on market price and often settled in cash or cash equivalents.Parties to a future

contract may buy or write options on futures.
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Swaps: Swaps is a simultaneous buying and selling of the same security or underlying

asset.

-Interest rate swaps-When exchange of fixed rate for a floating rate or floating rate to fixed

rate of floating to fixed rate occur.

Currency swaps: when exchange from one currency to another Currency occurs.For

example,USD to Indian Rupee

Author:Hawre M.A 12 Apr 2009 Member Level:Silver Points : 8 (Rs 8) Voting

Score:0

Dear Anonymous,

Future and options are derivatives. You can think like this-

Orange is main product and orange juice is its derivative.

Owning a car is main product and getting a car on rent is a derivative.

Ok, Now in stock market there are two types of derivative available

i) Future and

ii) Options

i) Future==>

Now suppose one wants to buy tons of sugarcane before the crop is available. What that

person will do ? He will go to farmer and tell him that I want you to sell all your sugarcaneas soon as the crop yeild at a fix rate say 1000 Rs/ton.

Now suppose in future when crop yeilds and price of sugarcane goes upto 1200 Rs/ton

then the buyer has made profit of 200 Rs/ton(1200-1000).

And if in future when crop yeilds and price of sugarcane goes down to 800 Rs/ton

then the buyer has made loss of 200 Rs/ton(1000-800).

ii)Options==>

In options it is not compulsory to purchase the product.

Consider the same eg as above.

Now suppose one wants to buy tons of sugarcane before the crop is available. What that

person will do ? He will go to farmer and tell him that I want you to sell all your sugarcane

as soon as the crop yeild at a fix rate say 1000 Rs/ton. and he will the premium amount say

of 20 Rs/ton.

Now suppose in later when crop yeilds and price of sugarcane goes upto 1200 Rs/ton
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then the buyer has made profit of 180 Rs/ton(1200-premium of Rs 20-1000).

And if later when crop yeilds and price of sugarcane goes down to 800 Rs/ton

then the buyer has made loss of 20 Rs/ton( only premium),because its not compulsory to

buy in options as against of futures.

Hopes you got your answer.

Do Questioning here at indiastudychannel.com

Many more experts are available here to help those who are in need.

Regards

prof. Hawre.M.A

Author:Aditya 10 May 2009 Member Level:Gold Points : 2 (Rs 1) Voting

Score:0

Let me tell first about Futures in simple language.

This is all about the investor view of future price of any share or commodity.They are secure

in nature and traded under SEBI guidelines.

A particular quantity as defined by the stock exchange is to buy or sell and needs to be

squared of before/on settlement period/day.A particular margin is required for investing in

futures and that margin is to be maintained throughout the time till the position is open.

For details go on nseindia.com and see the details in derivative section.

There is a great relationship between risk and reward in options and these are more

speculative in nature.

Options are of two types.Call option and Put option.

Call option:-These options are brought in the anticipation of positive price movement of

particular share during the settlement periond.The premium paid for this anticipation is tne

price of that option.A Buyer has the right to exercise his option during the settlement period

but not having the obligation but the writer has the obligation to square off his position.Thegain in the call option is the increment in premium value less the buying value during the

settlement period if option is exercised and the maximum loss wil be equal to premium paid

for buying that option.

Put option:-These options are brought in the anticipation of negative price movement of

particular share during the settlement periond.The other characterstic of the option is same
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as the Call option.

If any query further or want to learn trading in Futures and Options one can contact me on

ISC.

Author:Sumit Agarwal 17 May 2009 Member Level:Silver Points : 0 Voting

Score:0

are futures n options more risky than cash trading ?

i do only cash, and i still think that cash is safe, am i right or wrong ?

someone please clarify ?

Author:Ashis Dubey 18 May 2009 Member Level:Gold Points : 2 Voting

Score:0

Dear friend,

A futures contract is a type of derivative instrument, or financial contract, in which two

parties agree to transact a set of financial instruments or physical commodities for future

delivery at a particular price. If you buy a futures contract, you are basically agreeing to buy

something that a seller has not yet produced for a set price. But participating in the futures

market does not necessarily mean that you will be responsible for receiving or deliveringlarge inventories of physical commodities - remember, buyers and sellers in the futures

market primarily enter into futures contracts to hedge risk or speculate rather than to

exchange physical goods (which is the primary activity of the cash/spot market). That is

why futures are used as financial instruments by not only producers and consumers but also

speculators.

The consensus in the investment world is that the futures market is a major financial hub,

providing an outlet for intense competition among buyers and sellers and, more

importantly, providing a center to manage price risks. The futures market is extremely

liquid, risky and complex by nature, but it can be understood if we break down how it

functions.

While futures are not for the risk averse, they are useful for a wide range of people.
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Nowadays, many investors' portfolios include investments such as mutual funds, stocks and

bonds. But the variety of securities you have at your disposal does not end there. Another

type of security, called an option, presents a world of opportunity to sophisticated

investors.

The power of options lies in their versatility. They enable you to adapt or adjust your

position according to any situation that arises. Options can be as speculative or as

conservative as you want. This means you can do everything from protecting a position

from a decline to outright betting on the movement of a market or index.

This versatility, however, does not come without its costs. Options are complex securities

and can be extremely risky. This is why, when trading options, you'll see a disclaimer like

the following:

Options involve risks and are not suitable for everyone. Option trading can be speculative in

nature and carry substantial risk of loss. Only invest with risk capital.

Despite what anybody tells you, option trading involves risk, especially if you don't know

what you are doing. Because of this, many people suggest you steer clear of options and

forget their existence.

On the other hand, being ignorant of any type of investment places you in a weak position.

Perhaps the speculative nature of options doesn't fit your style. No problem - then don't

speculate in options. But, before you decide not to invest in options, you should understand

them. Not learning how options function is as dangerous as jumping right in: without

knowing about options you would not only forfeit having another item in your investing

toolbox but also lose insight into the workings of some of the world's largest corporations.

Whether it is to hedge the risk of foreign-exchange transactions or to give employees

ownership in the form of stock options, most multi-nationals today use options in some form

or another.

Source :-http://www.investopedia.com/university/options/

With Best Regards,

Ashis Dubey

ISC GOLD MEMBER


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Add Me As Buddy

Author:ravi 26 May 2009 Member Level:Silver Points : 2 (Rs 2) Voting

Score:0

future and options are the type of derivatives

A 'Future' is a contract to buy or sell the underlying asset for a specific price at a pre-

determined time. If you buy a futures contract, it means that you promise to pay the price

of the asset at a specified time. If you sell a future, you effectively make a promise to

transfer the asset to the buyer of the future at a specified price at a particular time. Every

futures contract has the following features:

Buyer

Seller

Price

Expiry

Options contracts are instruments that give the holder of the instrument the right to buy or

sell the underlying asset at a predetermined price. An option can be a 'call' option or a 'put'

option.

A call option gives the buyer, the right to buy the asset at a given price. This 'given price' is

called 'strike price'. It should be noted that while the holder of the call option has a right to

demand sale of asset from the seller, the seller has only the obligation and not the right. For

eg: if the buyer wants to buy the asset, the seller has to sell it. He does not have a right.

Similarly a 'put' option gives the buyer a right to sell the asset at the 'strike price' to the

buyer. Here the buyer has the right to sell and the seller has the obligation to buy.

Author:prateek sharma 02 Jun 2009 Member Level:Bronze Points : 0 Voting

Score:0

this powerpoint slide will help u get indepth knowledge of futures and options...

Futures and options.ppt
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Author:Robert 11 Jun 2009 Member Level:Bronze Points : 2 (Rs 2) Voting

Score:0

Futures and options are the derivative products of National stock exchange.

All the NSE Members can have derivatives that can exist for a month contract.

Persons holding the demat Account and Trading account can operate

on such feautures and can generate revenues from that.

The value for any company can be bet by taking either call options or futures . if the trading

index increases then automatically invested money increases.
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Future and Options Are Derivatives Basic

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