Question

1. Compare and contrast options and forward contract.

2. What factors distinguish a forward contract from a future contract? What do forward and futures contracts have in common? What advantages does each have over the other?

Answer 1

Ans ) Options contract : An options contract is an agreement between a buyer and seller that gives the purchaser of the option the right to buy or sell a particular asset at a later date at an agreed upon price. Options contracts are often used in securities, commodities, and real estate transactions.

Forward contract : In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on at the time of conclusion of the contract, making it a type of derivative instrument.

​​​​​​Difference between the forward contract and options contract

Basic difference in both of these is that the option contract is standardized contract on exchange whereas forward contract are negotiated agreement between parties.

Similarities between the forward and options contract : both of these are the main instruments of financial derivatives. 1 ) options contract 2 ) future contract 3 ) forward contract .

Ans 2 ) Future contract : A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange.

Forward contract : In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on at the time of conclusion of the contract, making it a type of derivative instruments.

Advantages of future contract .

The most common advantages include easy pricing, high liquidity, and risk hedging. The major disadvantages include no control over future events, price fluctuations, and the potential reduction in asset prices as the expiration date approaches.

Advantages of forward contract

• It offers a complete hedge.
• They can be matched against the time period of exposure as well as for the cash size of the exposure.
• Forwards are tailor-made and can be written for any amount and term.
• Forwards are over the counter products.

Difference Between the future contract and forward contract.

Both are the financial instruments

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