Why one should invest in Futures, Forwards or Options ?

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 for the risks of the spot market). They open up new possibilities in every kind of market situation. They allow investors to calculate and estimate potential risks and profits. They complement the normal spot market trade.

You can trade derivative instruments without owning the underlying security. (Eg you can sell a security before you even bought it)

Futures

Futures are highly standardized with regard to the underlying assets and delivery dates. Therefore an agreement on a future purchase can easily be repealed by an agreement on a future sale. With this step, a profit can be realized even before the delivery date.

Additionally, futures offer daily resettlement of gains and losses (not just a settlement at maturity). That means a new price is determined each trading day. -> High level of validation security.

Forwards

Forwards are not as standardized as Futures and can be individually adapted to the needs of the trading partners. Therefore they are more difficult to set up and less liquid for trading with other trading partners. Also, they have a higher settlement risk than futures.

The positive aspect is that forwards are not restricted to a few contract types and delivery dates. Also, the delivery amount could be individually adapted to one’s needs.

Options

Can be standardized even then are still not binding for the buyer