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In: Finance

Compare and contrast options and forward contracts.

Compare and contrast options and forward contracts.

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Expert Solution

Forwards contracts

Forwards contracts is a customized financial contract between two parties in which one party agree to buy or sell the commodity at a specific price and at a specific future date and the other party agree to make sell or purchase. in forward contract all settlement is done in Physical delivery.

Options contract

Option contract is defined as sell or buy the right but obligation to sale of buy any underlying assets at specified price after prespecified period. Cash settlement is done in option contract.

Compare and contrast options and forward contracts is mention below:

1. Forward contact is customized contract while, option contract is standardized contract.

2. Option contract is backed by clearing house stock exchanges but forward is not backed by any exchanges.

3. in forward contact either party does not pay anything during enter in to contact while in option contact premium is paid.

4. Forward contact is settle in physical delivery while option contact is settle in cash.

jeff jeffy answered 10 months ago
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