A “future” in market terms, is a contract to buy or sell a commodity for a specific price at a specific time in the future. That contract (or future), can be bought and sold up until that date. Think of it this way: today, an apple costs 25¢ but you think the price will go up 50¢ next fall. You decide to buy a contract with an apple farm for an apple next fall at today’s price. Now you can sell that contract up until next fall.
Posts Tagged ‘options’
An Exotic Derivative is…
Thursday, July 21st, 2011An exotic derivative is – you guessed it – an exotic member of the larger derivative family. It’s basically any derivative (aka complicated financial product) that is considered out-of-the-box. The label is somewhat time-dependent because a product that is “exotic” now may become commonplace in twenty years. All the other (boring) derivatives are often referred to as “vanilla.” So it’s up to you – will it be vanilla or triple-chocolate macadamia in that investment waffle cone?
What’s the difference between futures and options?
Wednesday, October 21st, 2009Options and futures are both contracts under which you agree to buy or sell an asset at a later date, but the main difference is that options offer you just that – an option to buy. You have to pay a premium for an option, but in return you are not obligated to do anything: you can choose to buy the agreed-upon assets at any time during the period set out in the contract, but you are never required to do so.
Futures contracts come with no premium attached, but they do impose obligations on both buyer and seller. When the predetermined time comes, the buyer absolutely must buy the assets, and the seller must sell them. In addition, the value of the assets used in futures contracts are usually greater than those used for options, so there’s much more risk in a futures contract: by the time you have to buy (or sell) your assets, their value may have changed dramatically, for better or for worse, but you still have to buy (or sell) at the price agreed upon when the futures contract was drawn up.
A Grantor is…
Friday, August 21st, 2009A grantor is the person who grants a buyer the right to purchase an option.
What trades on the CME?
Monday, August 10th, 2009The CME is the Chicago Mercantile Exchange, the largest futures exchange in the United States. The CME is also the exchange where the idea of a futures contract first developed (all the way back in 1851, when it was called a “forward” contract). The exchange trades in futures and options for all major asset classes; its four main product areas for futures are interest rates, stock indexes, foreign exchange, and commodities.
An Option is…
Wednesday, August 5th, 2009An option is a contract that gives you the right to buy (or sell) a security at a preset “strike” price on a preset “expiration” date. As the name suggests, you have the option, not the obligation, to buy (or sell) on the day specified in the contract.
A Derivative is…
Wednesday, August 5th, 2009A derivative is a security that gets its value from another financial asset but has no financial value in and of itself. A share of a company has inherent value in that you actually own a part of the company. However, an option – a derivative that gives you the option to either sell or buy a particular asset by a set date – derives its value from the potential value of the asset. There are many types of derivatives including futures, swaps, and exotic derivatives.
A Commodity is…
Monday, May 18th, 2009A commodity is a raw material that’s just like any other raw material. For example, tobacco, rice, petroleum, iron ore and cows are all commodities because they’re basically the same no matter what company “produces” them. iPods and breakfast cereals aren’t commodities because they’re processed and branded. Even though they may use commodities in their production (such as metal and wheat flour), the final product is tied to the success or failure of its particular company.
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