Question

In: Finance

In your own words, explain the critical differences between the forward, the futures, and the options...

In your own words, explain the critical differences between the forward, the futures, and the options markets. What advantages does a futures market offer that is not available in a forward market? What advantages does a forward market offer that is not available in a futures market? What advantages does an options market offer over a forward or a futures market?

Solutions

Expert Solution

Options and futures are traded as a standardized contract whereas forward contracts are customised in nature and it can be changed according to the need of the parties. Options and futures are often regularly traded as it is a part of the derivative segment but forward markets are not often traded frequently.

In a future market there is flexibility of of entering into and getting out of different contracts as and when the parties want, but in forward contract since there is no continuous trading there is a low level of flexibility.

forward Market offer customised contracts whereas future market does not offer customised contract and it will always be standardized and it is not flexible upon the need of the parties.

Options market helps in taking positions through a lot of leverage and it is a low cost strategy which can lead to very high advantage whereas forward and futures are not that leveraged.


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