Options markets, Financial Management

Assignment Help:

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.

 


Related Discussions:- Options markets

Types of dividend policy, TYPES OF DIVIDEND POLICY 1. Regular dividen...

TYPES OF DIVIDEND POLICY 1. Regular dividend policy: Payment of dividend at standard rate is known as regular dividend policy. 2. Stable dividend policy: Payment of fix

Straddle strategy, An options strategy by which an investor owns a position...

An options strategy by which an investor owns a position in both a call and put market with the same strike price and expiration date.

Symmetric cash matching, We have earlier studied that the investor ma...

We have earlier studied that the investor may have to carry cash for some time because of discrepancies arising between the timing of the bond's cash-flow and the

Role of financial intermediaries in the financial system, Role of Financial...

Role of Financial Intermediaries in the financial system: Having designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor

Players in primary market, PLAYERS IN THE PRIMARY MARKET Some important...

PLAYERS IN THE PRIMARY MARKET Some important players in the primary market are: Merchant Bankers When a company approaches the public for funds, merchant bankers manage

Calculate the price of commonwealth bonds, Calculate the Price of Commonwea...

Calculate the Price of Commonwealth bonds Commonwealth Company has a 10% coupon bond with a par value of $1000, The current yield to maturity on new bonds is 8%. If interest is

Exam answers, Prepare your recommendation on Agarwal Cast Company

Prepare your recommendation on Agarwal Cast Company

gaaps that are mandatory, a) Talk about in brief the various GAAPs that ar...

a) Talk about in brief the various GAAPs that are mandatory to be followed. b) What are the several components of total cost.

Write out the equation or draw the budget line, You have $21 to spend on pr...

You have $21 to spend on prawns and potatoes. Prawns cost $20 per kilo and potatoes cost $2 per kilo.   (a) Supposing you can buy as much or as little as you want of prawns and

Straight line depreciation, Alger Corp wants to buy some construction equip...

Alger Corp wants to buy some construction equipment for $50,000, which has a useful life of 4 years with no salvage value. Alger uses straight-line depreciation. Alger has a tax ra

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd