by A futures contract is an agreement to buy or sell an asset at a predetermined price on a future date. A long position means the buyer agrees to purchase the asset in the future, betting prices will rise. A short position means the seller agrees to deliver the asset later, expecting prices to fall. Both positions are used for hedging or speculation. Futures are standardized contracts traded on exchanges, with daily mark-to-market settlements ensuring credit risk management. Longs profit from price increases, while shorts gain when prices decline.
Features of Futures Contracts
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Standardized Contracts: Futures contracts are standardized in terms of quantity, quality, and delivery time, facilitating easy trading on exchanges.
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Obligation to Buy or Sell: Both parties—the buyer (long) and seller (short)—are obligated to fulfill the contract at maturity unless they close positions earlier.
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Margin Requirements: Traders must deposit an initial margin and maintain a maintenance margin to cover potential losses, ensuring financial discipline.
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Mark-to-Market: Daily settlement of profits and losses adjusts margin accounts, minimizing default risk.
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Leverage: Futures allow high leverage, enabling control of large positions with relatively small capital.
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Delivery or Cash Settlement: Contracts can be settled by physical delivery of the asset or cash settlement depending on the contract terms.
Options (Call and Put Options)
Options are contracts granting the right, but not the obligation, to buy or sell an asset at a specified price before or on expiration. A call option gives the holder the right to buy the asset, benefiting from price increases. A put option gives the right to sell, profiting from price declines. Buyers pay a premium for these rights. Options provide flexibility for hedging or speculative strategies with limited risk (premium paid). Unlike futures, options do not obligate the holder to execute the contract.
Features of Options Contracts
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Right Without Obligation: Option buyers have the right, but not the obligation, to buy (call) or sell (put) the underlying asset.
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Premium Payment: Buyers pay a premium upfront to acquire this right, which is the maximum loss they can incur.
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Expiration Date: Options have a fixed expiration date, after which the right expires worthless if not exercised.
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Strike Price: The price at which the underlying asset can be bought or sold is predetermined and fixed.
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Flexibility: Options provide strategic flexibility, allowing for hedging, speculation, or income generation through various combinations.
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No Obligation for Buyers: Unlike futures, option holders can choose not to exercise, limiting their downside risk to the premium paid.
