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Forward vs. Futures Contracts Explained

A forward contract is an agreement between a bank and customer to buy or sell a specific amount of currency at a predetermined exchange rate on a future date. Forward contracts are customized for each transaction. Settlement occurs on the forward date. Both parties assume credit risk. Futures contracts are agreements traded on an exchange to buy or sell an asset for delivery on a future date at a fixed price. These contracts are standardized. Settlement occurs on the last working day of the month. Margin payments are required but there is no credit risk to the parties. Brokerages are involved in futures contracts.

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5 views6 pages

Forward vs. Futures Contracts Explained

A forward contract is an agreement between a bank and customer to buy or sell a specific amount of currency at a predetermined exchange rate on a future date. Forward contracts are customized for each transaction. Settlement occurs on the forward date. Both parties assume credit risk. Futures contracts are agreements traded on an exchange to buy or sell an asset for delivery on a future date at a fixed price. These contracts are standardized. Settlement occurs on the last working day of the month. Margin payments are required but there is no credit risk to the parties. Brokerages are involved in futures contracts.

Uploaded by

Smit Vyas
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Q.

FORWARD

1.

A Forward contract can be a contract


between bank and customer in which
buy /sell a specific amount of money
within a fixed period at a rate decided
on the same day.

2.

The contract are must be customized

3.

4.

Settlement are must be done any


forward date

Both party take a credit risk

FUTURES
A futures contract can be defined as agreement
between exchange and operators in which the buy/sell
the amount for a delivery at maturity date in a future at
a fixed rate

This contract are must be standardized.

All future contracts are settle med in last working date


of the month.

Do not involve credit risk, in both party

5.
The contract does not involves any
margin payment

6.

Involves maintenance of margin amount.

There is no intermediaries involves


In this brokerages are must be involves

6. What do you understand by the inthe-money and out-of-the money


options?

ANS:
IN option there are two type of option one is CALL OPTION
and seconded is PUT OPTION.
CALL OPTION IN THE MONEY means strike price is less than
market price is called in the money.
CALL OPTION OUT OF THE MONEY means the strike price is
higher than market price is call out of the money

PUT OPTION IN THE MONEY MEANS strike price is higher


than market price is call out of the money
OUT OF THE MONEY MEANS strike price is less than market
price is called in the money.

3. What is a put-ratio spread and


under which market conditions would
this strategy be desirable?
ANS:
1} BUY ONE HIGHEST PRICE PUT OPTION
2} SELL 2 LOWER PRICE PUT OTION
The trader has a clear bearish view on the markets. Gamma is
negative in this option & highly sensitive to changed in market
price.

Because this strategy offers a relatively limited


reward in exchange for a rather amount of risk, ratio
put spreads are probably best reserved for
experienced option players.

[Link] will you use a long calendar spread to


maximize your profits? Give an example
each for a bullish as well as a bearish view?

ANS : A Call Bull Spread is an option strategy lower strike


call option is BUY and a higher strike call option is SELL,
AT A SAME TIME
SELL SEPTEMBER 8200CE @ 28
BUY OCT 8200 @78
SELL OCT 8500 @25
78 28= 50
50 -25=25
limited profit and limited loss type of a profile.

Bearish view
higher strike put option is bought and a lower
strike put option is sold, Same time
BUY AT 350 PE @25

SELL AT 310 PE @5
PRFIT IS (40-25)=15
(15+5)=20
MAXIMUM PROFIT IS 20,,

8) What do you understand by


implied volatility of options?
ANS : when volatility is higher than it`s given a
signal to sell the option ,and exit the market. The
investor is selecting the short position in the
market. Selling option is higher than buying option
in the spared strategy. If investor is short the option
than gamma is also low level. A short gamma than
trader prefer the market to move very slow .the
gamma will get the benefit of the time value in the
position. The implied volatility of an option is a
more useful measure of the option's relative
value than its price. Price of an option

depends most directly on the price of its


underlying asset. Implied volatility is so
important that options are often quoted in terms
of volatility rather than price

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