Derivatives Futures And Options

Derivatives, in dictionary terms, refer to an instrument whose value depends on an underlying. It is pretty simple to understand. The value of a derivative must be derived from the value of something. Now, when it comes to trading, there are many different types of derivates. Two of which, we’ll be discussing in this article.

Derivatives Futures and Options

Both futures and options can be quite complicated because they are what you refer to as hybrid investments or derivative. They are also considered to be high risk investments by some traders whilst there are those who see them as protection against any price changes that might greatly affect their profits. After all, we all know just how volatile the market can be. Futures and options can be once or twice removed from a real product. As mentioned earlier, trading with futures and options can go both ways depending on how you perceive the process. It can be a means to reducing your investment risks whilst at the same time; it could also be one of the riskiest investments that you will ever make.

Futures

This refers to a derivative contract wherein the rate, date and quantity of a particular future purchase are agreed upon for a given product within the same day. In this type of contract, both sides are required to honor their commitment. The buyer has to take the delivery and the seller has to make said delivery according to what is stipulated in the contract. This applies even when the price for that particular product goes down or up. The pre-decided price would remain the same. This is why some consider derivatives futures and options contract to be both risky and beneficial depending on the kind of situation your find yourself in.

Options

As the name itself suggests, when it comes to this type of derivative contract, the buyer would have the option to take delivery of the asset and not the obligation. Therefore, if the price of this specific asset or product does go up in the market, the buyer can exercise this option and receive profits through it. However, in the event that the price goes down the buyer need not make use of it and allow the option to simply lapse.

So there you have it, a quick overview of derivatives futures and options.

By: Smith Ries

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