Economics Options And Futures Questions Medium
Options and futures are financial derivatives that are traded on the market. They are contracts between two parties, the buyer and the seller, which give the buyer the right, but not the obligation, to buy or sell a specific asset at a predetermined price and within a specified time period.
Options are contracts that give the buyer the right to buy (call option) or sell (put option) the underlying asset at a predetermined price, known as the strike price, on or before the expiration date. The buyer pays a premium to the seller for this right. Options provide flexibility and allow investors to speculate on the future price movements of the underlying asset without actually owning it.
Futures, on the other hand, are contracts that obligate both the buyer and the seller to buy or sell the underlying asset at a predetermined price and on a specific future date. Unlike options, futures contracts are binding and must be fulfilled by both parties. Futures are commonly used for hedging purposes, allowing market participants to manage their price risk and protect against adverse price movements.
Both options and futures are widely used in financial markets for various purposes. They provide opportunities for investors to speculate, hedge, and manage risk. These derivatives play a crucial role in price discovery, liquidity, and overall market efficiency. However, they also involve risks, such as potential losses and the complexity of understanding and managing these instruments.