luLures vs CpLlons

uerlvaLlves are creaLed form Lhe underllng asseL llke sLocks bonds and commodlLles 1hey are
known Lo be Lhe mosL compllcaLed lnsLrumenLs ln Lhe enLlre flnanclal markeL Some of Lhe lnvesLors
flnd Lhem rlghL lnsLrumenLs for rlsk managemenL whlch lncreases llquldlLy Powever Lhey are
exLremely lmporLanL and have huge effecLs on flnanclal markeLs and Lhe economy uerlvaLlves are
malnly of Lwo klnds whlch are fuLures and opLlons 1here ls a marked dlfference beLween fuLures
and opLlons

1he meanlng of fuLures ls summarlzed as Lhe conLracL made by Lwo dlfferenL parLles elLher Lo
purchase or sell producLs aL a fuLure perlod where Lhe prlces are predeLermlned 1he meanlng of
opLlons ls Lhe rlghL wlLhouL Lhe obllgaLlon Lo purchase and sell underllnlng asseLs Call opLlon sLands
for Lhe rlghL wlLhouL obllgaLlon Lo only buy Lhe underllnlng asseL and Lhe purchaser may refuse Lhe
conLracL prlor Lo lLs maLurlLy uL opLlon means Lhe opposlLe of call opLlon

1he baslc dlfference of fuLures and opLlons ls evldenL ln Lhe obllgaLlon presenL beLween buyers and
sellers ln Lhe fuLure conLracL boLh Lhe parLles are engaged ln a conLracL wlLh obllgaLlon Lo purchase
or sell Lhe asseL aL a parLlcular prlce on Lhe day of seLLlemenL 1hls ls a rlsky proposlLlon for boLh Lhe
parLles ln case of Lhe opLlon conLracL Lhe buyer has Lhe rlghL wlLhouL any obllgaLlon Lo purchase or
sell Lhe underlylng asseL 1hls ls Lhe pecullarlLy of Lhe Lerm 'opLlon' and Lhe prlce ls pald aL a
premlum WlLh Lhls klnd of Lradlng Lhe purchaser's rlsk becomes llmlLed Lo Lhe paymenL of premlum
buL Lhe prospecLlve proflL ls unllmlLed

8eslde hls commlsslons Lhe lnvesLor ls able Lo engage ln fuLure conLracL wlLhouL any advance
expendlLure ln Lhe opLlons case lL requlres Lhe paymenL of a premlum Lo be made 1hls addlLlonal
charge ls pald Lo geL rellef from Lhe obllgaLlons Lo purchase underlylng asseLs ln case of negaLlve
shlfL ln prlces of asseLs 1he only loss would be ln Lhe shape of premlum when Lhe LransacLlon ls
made Lhough opLlon and hence Lhe rlsk remalns llmlLed wlLhln Lhe paymenL of premlum

1he oLher fundamenLal dlfference beLween fuLures and opLlons relaLes Lo Lhe slze of Lhe sLock
poslLlon usually Lhe poslLlon of underlylng asseLs ls very huge for Lhe fuLure conLracLs naLurally
Lhe obllgaLlon Lo purchase or selllng of Lhls huge quanLlLy aL a speclfled prlce makes Lhe fuLure
Lradlng absoluLely rlsky for Lhe fresh lnvesLor

1he dlfference beLween fuLures and opLlons as flnanclal lnsLrumenLs deplcL dlfferenL proflL plcLures
for parLles 1he galn ln Lhe opLlon Lradlng can be obLalned ln cerLaln dlfferenL manners Cn Lhe
conLrary Lhe galn ln Lhe fuLure Lradlng ls auLomaLlcally llnked Lo Lhe dally flucLuaLlons ln Lhe markeL
1hls ls Lo say LhaL Lhe value of proflL poslLlons for lnvesLors ls dependenL upon Lhe markeL poslLlon aL
Lhe close of Lhe Lradlng everyday 1herefore every lnvesLor should have a prlor knowledge of boLh
fuLures and opLlons before Lhey enLer Lhe flnanclal markeL operaLlons
Summary
1 A fuLure ls a conLracL whlch ls governed by a predeLermlned prlce for selllng and buylng aL a
fuLure perlod ln opLlons Lhere ls Lhe rlghL Lo sell or purchase of underlylng asseLs wlLhouL any
obllgaLlon
2 A fuLure Lradlng has open rlsk 1he rlsk ln opLlon ls llmlLed
3 1he slze of Lhe underlylng sLock ls usually huge ln fuLure Lradlng CpLlon Lradlng ls of normal slze
4 luLures need no advance paymenL CpLlons have Lhe advance paymenL sysLem of premlums