Question

1)Describe the key differences between currency futures and options.

2)Dec. 2020 Euro futures is now trading at $1.1650.  If you buy one Euro futures contract (size = C$100,000) at this price and sold it at expiration when its price settles at $1.1720, what is your profit/loss from this transaction?

Answer 1

1)

BASIS FOR COMPARISON	CURRENCY FUTURES	CUURECNY OPTIONS
Meaning	Futures contract is a binding agreement, for buying and selling of a financial instrument at a predetermined price at a future specified date.	Options are the contract in which the investor gets the right to buy or sell the financial instrument at a set price, on or before a certain date, however the investor is not obligated to do so.
Obligation of buyer	Yes, to execute the contract.	No, there is no obligation.
Execution of contract	On the agreed date.	Anytime before the expiry of the agreed date.
Risk	High	Limited
Advance payment	No advance payment	Paid in the form of premiums.
Degree of profit/loss	Unlimited	Unlimited profit and limited loss.

2)

PROFIT FROM TRANSACTION =( VALUE AT THE END OF PERIOD - VALUE AT THE BEGINING OF PERIOD ) x CONTRACT SIZE

= (1.1720 - 1.1650) x 100,000

= 0.0070 x 100,000

= $700