Options markets, Financial Management

Options Markets:

Man has always been innovative and ingenuous. His determination to improvise and overcome the limitations of various processes has resulted in phenomenal and epoch-making discoveries and inventions. To overcome the limitations of proprietorship firms, he discovered the limited companies concept. To limit his dependence on term lending institutions he invented various types of instruments to raise long-term as well as short-term finance like different types of debentures, commercial paper and global depository receipts.

Options and Futures are also the result of this unrelenting search for better financial instruments. They belong to a class of instruments referred to as ‘Derivatives' because they derive their value from an underlying commodity or a financial asset. The underlying commodities and financial assets can range from mundane products like wheat and cotton to precious items like gold, silver, petroleum, and financial assets like stocks, bonds and currencies. Options on commodities have existed in different forms since 1860 for products as diverse as gold, wheat and tulip bulbs in the USA. An active over-the-counter market in stock options has also existed there for nearly a century. However, large-scale manipulations by intermediaries and the absence of standardized contracts resulted in the investors incurring heavy losses due to which the commodity options disappeared from the listing of many exchanges by 1968. It was only in 1973 that organized exchanges began trading options on equities. In 1982, futures on equity and options on bonds made their appearance on stock exchanges.

Now, we shall look at some of the differences between options and futures.

  • In options, the obligation to honor the contract is on the writer of the option, whereas in futures both the parties are equally responsible to honor their obligations.
  • In options, the buyer has to pay the premium to the writer of the option. In futures, both the parties have to deposit the initial margin with the clearing house and then have to pay variation margin depending on whether the price fluctuation is favorable to them or not.
  • American options can be exercised any time before the expiration day, while the European options should be exercised on the last day of expiration period. In futures, no such distinction exists and the parties are expected to honor the contract on the settlement date.
  • In options, the buyer limits the downside risk to the extent of premium paid. He, however, retains the upside potential. In futures, the buyer is exposed to the whole of the downside risk and has the potential for all the upside return.
  • The expiration period for options is nine months, while for futures it is twelve months.
  • Options are employed by both hedgers and speculators, while trading in futures is by and large done by speculators.


Posted Date: 9/10/2012 9:23:35 AM | Location : United States

Related Discussions:- Options markets, Assignment Help, Ask Question on Options markets, Get Answer, Expert's Help, Options markets Discussions

Write discussion on Options markets
Your posts are moderated
Related Questions
A Life Insurance Company invested $10,000,000 in pure-discount U.S. bonds in May 1995 while the exchange rate was 80 yen per dollar. The insurance company liquidated the investment

The values shown in ordinary annuity tables (either present value or compound value) can be adjusted to the annuity due form by ____ the ordinary annuity interest factor by ____. (

Accounting Framework - Convention of Conservation Conservatism refers to the principle and practices that are established through way of tradition, reluctance to change from e

Structure and Participation of Hedge Funds: The typical structure for a Hedge Fund is to facilitate the tax concerns of investors and fund managers. Basically, there are two or

Controlling is an essential management function as efficient control mechanisms ensure that the performance of the company increases over time through the incorporation of feedback

formula and explanation for Gordon''s dividend capitalization method

How would you judge the potential profit of Bajaj Electronics on the first year of sales to booth Plastics and give your views to increase the profit?

You are currently employed by DPT Holdings Ltd (DPT) one of the world's largest MNEs based in the United Kingdom. DPT is looking to enter into a new phase of global expansion activ

Along the dimension of security, bonds can be classified into unsecured (straight) bonds and secured (mortgage) bonds. Unsecured bonds have no charge on any speci