2. What is Derivatives?
Derivatives are financial contracts, set between two or more parties, that
derive their value from an underlying asset, group of assets, or benchmark.
A derivative can trade on an exchange or over-the-counter.
Prices for derivatives derive from fluctuations in the underlying asset.
Derivatives are usually leveraged instruments, which increases their
potential risks and rewards.
Common derivatives include futures contracts, forwards, options, and
swaps.
3. What is Options and Futures?
Options and futures are similar trading products that provide
investors with the chance to make money and hedge current
investments.
An options contract gives an investor the right, but not the
obligation, to buy (or sell) shares at a specific price at any time, as
long as the contract is in effect.
By contrast, a futures contract requires a buyer to purchase
shares—and a seller to sell them—on a specific future date, unless
the holder's position is closed before the expiration date.
6. How Do Both Sides of Futures
Avoid Price Change Risk
A futures contract is a standardized, legal agreement to buy or sell
an asset at a predetermined price at a specified time in the future.
Futures contracts allow corporations–especially corporations that
are producers and/or consumers of commodities–and investors to
hedge against unfavorable price movements of the underlying
assets.
When corporations invest in the futures market, it is usually
because they are attempting to lock in a more favorable price in
advance of a transaction they are required to make in the future.
The main advantage for investors looking to participate in the
futures market is that it can remove the uncertainty about the
future price of a security or a financial instrument.
8. References
Beers, B. (2022, May 11). How are futures used to hedge a position? Investopedia.
Retrieved May 25, 2022, from
https://www.investopedia.com/ask/answers/06/futureshedge.asp
Fernando, J. (2022, February 8). What is a derivative? Investopedia. Retrieved May 25,
2022, from https://www.investopedia.com/terms/d/derivative.asp
HarvestPublicM. (2016, May 25). Futures market explained. YouTube. Retrieved May
26, 2022, from https://www.youtube.com/watch?v=CC9VeHrI3Es
Hayes, A. (2022, March 6). Options vs. Futures: What's the Difference? Investopedia.
Retrieved May 25, 2022, from https://www.investopedia.com/ask/answers/difference-
between-options-and-futures/
Marketinghdfcsec. (2018, August 5). Difference between futures and Options Contract -
HDFC Securities. YouTube. Retrieved May 26, 2022, from
https://www.youtube.com/watch?v=-efa99L9J08
