FIN 14153 SEU Options and Fut

Question

Explain the differences between Options and Futures Contracts? Using one example, how Options and Futures Contracts can be used to hedge against risk?

Hello ,, how u doing ? I forgot to tell u that we have( You are required to reply to at least two peer responses to this week’s discussion question. Your replies need to be substantial and constructive in nature.  ) can u please do it for me ? this is the first responses Futures and options contracts are financial instruments designed to provide their holders with a profitable instrument.  Forward contracts are defined as the legally binding contract to trade the underlying assets (such as bonds, shares, etc.) at an agreed price, on a specific date in the future.  Because the contract is legally binding, the parties must transfer cash in a row and it is a transferable contract.  Options is the right to execute a contract at a predetermined price before the expiry of the specified period, but the investor is not obligated to do so, and this means that the holder of the option contract can choose between using the contract or not.  Farmers who sell their crops face a worry about whether they will be able to find buyers just by harvesting the crops. On the other hand, buyers have to find ways to secure their access to products in the future. To bypass this, both sellers and buyers used a forward contract to carry out the exchange of goods in the future for money.  As they have agreed on a fixed price, the merchant will have to deliver the commodity to the buyer at the predetermined time. Using futures contracts, the farmer will get a fixed price while the broker guarantees his delivery and estimates his business costs up front.  This is an example of the use of forward contracts.  With regard to an options contract, such as if a person wants to obtain a purchase option on a particular stock at an strike price of $250 within the next three months, the instrument is then traded at $245.  If the stock price jumps above $250 over the next three months, then he can buy it at $250 and immediately sell it and make a profit by calculating the difference. This means if the stock price drops below the strike price of $250, the person may miss the opportunity to exercise the option.  All he will lose in this example is the amount he initially paid.this is the second : Options Contract:An option contract is the right to buy or sell another asset at a certain price during a specified period of time. Options depend on the value of the underlying security such as a stock. An options contract also gives the investor the opportunity, but not the obligation, to buy or sell the asset at a specified price while the contract is still in effect. Investors do not have to buy or sell the asset if they decide not to. Orders to buy common stock and executive stock options. Buying and selling options are common examples of option contracts. A put option contract is the right to buy one hundred shares of a security at a fixed price, called the astonishing price, at any time until the contract expires, called its maturity date. A contract of sale is the right to sell one hundred shares of a security at the astonishing price until the contract’s maturity date. Other common contracts are combinations of buys and sells. For example, a crossover contract is a combination of a single mode and a single call.Forward Contract:A forward contract is the obligation to sell or buy an asset at a later date at an agreed upon price. Futures contracts are a true hedge investment and are very understandable when considered in terms of commodities such as corn or oil. The futures market has expanded considerably beyond oil and corn. Stock futures can be purchased on individual stocks or on an index such as the Standard & Poor’s 500 Index. The buyer of the futures contract is not required to pay the full amount of the contract up front. A percentage of the price called the initial margin is paid. Also, the payment that the buyer has to pay for the commodity when the futures contract matures is simply the price of the commodity at that time. In so-called cash-settled contracts, such as futures contracts for stock market indexes, there is no exchange of the commodity and the cash price on the maturity date.Hedging Against Risk:An example of hedging investment against risk is the strategic use of financial instruments or market strategies to offset the risk of any negative price movements. When an investor uses futures contracts as part of his hedging strategy, his goal is to reduce the likelihood that he will experience a loss due to an unfavorable change in the market value of the underlying asset, usually a security or other financial instrument. However, you can hedge such positions through the use of options if there is a significant drop in the futures price. A slight drop in prices will allow options to be better hedging than futures.sorry , i really forgot to tell u . the due date is DEC 8 , please try to finish it before ,, thanks 

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