Futures and Options of Derivatives

Prepared by

Chand basha mcbEmerald’s School of Business

Option:- Option is a contract, that gives the owner right to buy or sell but not obligation, It is a short dated contract for a period of maximum three months.

Futures & Option Definitions

Future:- Future contract is an agreement between two parties to buy or sell a specified quantity of an asset at a specified price and at a

specified time and place. Futures contracts are normally traded on an exchange which sets the certain standardized norms for trading in the

futures contracts.

In 1848, future contracts are came into existence with the establishment of Chicago Board of trade.

Types of options• Real Option: This contract made on factors of production, this

underlying assets are commodities. Ex:Land,Labour,Capital,etc.

• Traded Option: This option is a standardized contract. Here underlying assets are clearing corporations

• Vanilla & Exotic option: Vanilla option is using in European and American countries, this underlying assets are equities and bonds

Exotic option is using in Asian countries and this is not standardized option and typical option. This underlying assets are indices.

Types of option models

• European model: Contract excise only after maturity period

• American model: Contract may excise on or before maturity date

• Bermuda model: Contract can excise before due date but have to code some dates to excise the contract.

Note: Indians are following European option model

Types of option participants

• Call Option: This option gives the holder, Right to buy but not obligation.

• Put Option: This option gives the holder, Right to sell but not obligation.

Note: Here price and quantity is pre-determined.

In the money: which is already achieved coded price that is called In the money.

Out of the money: which is yet to achieve coded price that is out of the money.

Note: The way of increasing trend in call option, and the way of decreasing trend in put option

Derivatives

• Derivatives are purely speculative and highly leveraged instruments

• Financial derivatives are simply the latest risk associated with derivatives,

• banking regulators should than their use by any institution covered by federal deposit insurance,

• Only large multinational corporation and large banks havbeb a purpose for using derivatives

• Financial derivatives are simply the latest risk-management

• Derivatives take money out of productive processes and never put anything back