Question

Briefly compare and contrast options and futures.

Answer 1

Options are derivatives contract where the same gives the right but not the obligation to boy or sell the stock / index/ foreign currency etc. There is a cost involved in buying the option and the same is known as option premium. Also there are two parties to the contract where one is long and other is short the contract. the party who is long pays to the party who is short. The long recieves money if the options are in the money and loses the option premium when the same is out the money.

Futures are standardized contract which comes in specific lot sizes. These are traded over exchanges and the exchange acts as intermeiary or custodian among teh parties to the contract. There are two sides to futures contract. One is short the contract and another is long the contract. Both have to deposit initial margin when entering into the contract. Also othe margin are adjusted with the daily loss and gains and when the margins are below the maintenance margins amoutn, margin money is called off from the parties.