Question

What are the different between swap, futures and future options

Answer 1

A swap refers to a contract in which two parties(also called counter parties) exchange their future cash flows A swap s facilitated by an intermediary..The most common form of swap is interest rate swap.Other forms of swap are common equity swap,currency swap etc.In an interest rate swap the involved parties will exchange the interest rate payments on a notional amount.A swap is used to reduce exposure to un favourable change in interest rate.

Forward:a forward contract refers to a customized agreement between two parties to buy or sell a specific amount of an asset at a future date for a set price.In a forward contract the parties involved are obligated to perform in accordance with the terms specified in the contract.

Future:A future contract is a forward based contract which is similar to forward in theory,but varies in terms of it's execution.The major difference between the two is that a future contract is traded on organized exchanges while forwards are negotiated by an intermediary.Future contracts are rarely closed by actual delivery and are closed out before maturity.

Options:Options refer to contracts between two parties where the purchaser of the contract gains the right to but not the obligation to (unlike forward contracts where it's an obligation) to buy or sell a given amount of underlying asset(shares,currency etc). The party with the option to buy or sell is the owner of the option ,and the other party becomes the seller or writer of the option.An option can be a call option(gives the owner the right to bu the underlying asset) and a put option (gives the owner the right to sell the underlying asset)