What are derivatives?
Derivatives such as Futures and Options are financial contracts,which derives their value off a spot price.The world over derivaties are a key of the financial systems.
What is Forward Contract?
In a forward contract , two parties agree to do a trade at future date,at a stated piece and quantity.No money changes hands at the time the deal is signed.
Difference between BADLA and Futures:
Badla:Expiration date not clear
Futures:Expiration date known
Badla;Counterparty risk present
Futures:No counter party risk
Options:
An option offers the holder the right to buy (Call) or sell(Put) the underlying asset for a predetermined price(exercise price) on or before expiry date.
Obligations in Futures Contract:
Buyer: The buyer has an oblibation to purchase the underlying asset some time in the future, for a price agreed today.
Seller:The seller of the contract has an obligation to deliver the underlying asset at some time in the future for a price agreed today.
Option pricing denends on:
The volatility of the underlying shares - How far in/out of the money the option is - time to expiry,Option value decays over time - Dividend - Interest rate(Cost to carry)
We will be back soon with many more info. on Futures and Options.
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