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

Evaluate alternative hedging strategies, Peak Inc. needs to order Canadian ...

Peak Inc. needs to order Canadian raw materials to use in its production process. The Canadian exporter typically invoices Peak in Canadian dollars. Assume that the current exchang

Explain the relationship between growth and inequality, While poverty reduc...

While poverty reduction has become the main goal of development efforts, there is an on-going and sometimes heated debate about the elements that would be at the center of any sens

Explain the term present value of the firm''s operations, Explain the term ...

Explain the term "present value of the firm's operations" (also known as Enterprise Value ).  What does this number represent? The present value of the company's free cash flo

Convexity measure , We can measure the convexity with the help of following...

We can measure the convexity with the help of following formula:                                                                              ...Eq. (4) Where,          Δ

Calculate the confidence interval of returns, Following are return expectat...

Following are return expectations on the S&P 500 index for the upcoming year with the corresponding probabilities: Expectation                                   Return

Explain foreign equity ownership restrictions, Explain foreign equity owner...

Explain foreign equity ownership restrictions. Why do you think countries entail these restrictions? Several countries restrict the maximum fractional ownership of local organiza

Resource acquisition and resource planning, 1. List five different types of...

1. List five different types of resource that a company might consider hiring or leasing. Explain why the might choose these option instead of outright purchase 2. List three di

What circumstances would market to book value ratios, Under what circumstan...

Under what circumstances would market to book value ratios be misleading?  Explain. The Market to Book ratio is helpful, however it is only a irregular approximation of how li

Operating cycle, application of the operating cycle to a vegetable company

application of the operating cycle to a vegetable company

Financial and economics evaluation, An offer given by charitable trust to d...

An offer given by charitable trust to develop and build a facility on a 10000 sqmt of plot in a prime locality of pune where 5000 sqmt of area will be used by the trust for housing

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