There are 3 main reasons for trading futures: Hedging By hedging one intends to transfer the risk of future price fluctuations to other market participants. There are two kinds of hedges: One would be a short hedge in which the investors hold positions from the spot market and holds the counterpositions from the derivatives market. With a short hedge, the […]
Depending on what one expects oft the market one can either open a long or short position: Long position: The purchase of a future at the price of 1 Euro means the obligation to purchase the underlying at a later date (eg. 1.2.2024) at the price of 1 Euro. Short position: The sale of a future at the price of […]
In the case of Financial Futures, the underlying for the Future is not a commodity or a good instead it’s a security, indices, or another instrument like interest rates. Futures are regulated with regard to the delivery amounts of their underlings. In the case of Commodity Futures, the underlying is a commodity or resource.
On the spot market, real goods such as commodities or stocks are traded. Delivery and payment happen immediately after the transaction has been concluded. On the derivatives market, agreements on future trades are traded. Therefore the delivery and payment of the goods do not happen immediately after the transaction has been concluded. That said, it becomes clear that one the […]
Futures, Forwards and Options allow the investor to protect (hedge) his capital against price changes (losses). Both instruments offer many new opportunities for different kinds of investors as they can be easily adapted to one’s needs. In general derivative instruments allow investors to hedge their (spot market) investments against price changes (Therefore the derivatives market is also called a market […]
Warrants and Options are very similar. The buyer of the warrant has the right to buy (in case of a call warrant) or sell ( in case of a put warrant) an underlying asset within an predetermined price. For that right the buyer pays an predeterminded premium (price) to the seller. However there are some differences:
Option buyer (long) Option issuer (short) Call: He will exercise option if prices of underlying rise He believes prices of underlying will fall or stay the same. If the prices rise and the option buyer exercises his option the issuer muss sell him the goods for the previously specified strike price Put: He will exercise option if prices of underlying […]
The financial markets offer market participants many investment opportunities with different risks. In general, it can be assumed that if market participants choose alternatives with the same expected return, they will choose the alternative with the lowest extent of risk. However, as different investments involve different risks, it is in the market participants’ interest to achieve an optimal risk allocation. […]
Futures transactions can be conditional or unconditional. In an unconditional futures transaction, both sides (seller and buyer) are obliged to fulfill their part of the transaction. In a conditional transaction the holder of the option has the right (but not the obligation) to buy or sell the underlying.
Market risk describes the estimated loss in the event of a market downturn. It results from possible changes in interest rates, prices (stock prices, commodity prices, etc.), political risks, etc. One can’t diversify the market risk on the spot market; however, frequently, derivative instruments strategies are used to minimize market risks.