A forward contract is a customized contract between two parties to buy or sell a specified quantity of a particular commodity at a specified price on a specified future date. Futures are exchange-traded forward contracts, i.e., forward contracts done in organized exchanges like stock or commodity exchanges.
A futures contract is standardized. To be more specific, futures being traded on exchanges have terms standardized by the exchange. The standardized items in any futures contract are: the quantity of the underlying product; quality of the underlying product (not required in financial futures); the date and month of delivery; the units of price quotation (not the price itself) and minimum change in price (tick-size); and the location of settlement.
In case of futures, after a trade is confirmed by two members of the exchange, the exchange house itself becomes the counter-party which guarantees every trade. Futures contracts are much more liquid and their price is more transparent due to the standardization and market reporting of volumes and price. A futures contract can be reversed with any member of the exchange. If futures contracts are priced above the spot price, it is known as the Contango market. If the futures price prevails below the spot price, it is known as Backwardation.
An option to buy is known as a call option, and is usually purchased in the expectation of a rising price; an option to sell is called a put option and is bought in the expectation of a falling price or to protect a profit on an investment. Options, like futures, allow individuals and firms to hedge against the risk of wide fluctuations in prices; they also allow speculators to gamble for large profits with limited liability. It costs nothing upfront to enter into a futures contract, whereas there is an immediate cost of entering into an options contract, called a premium.
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Stock Options
10 August 2010 8:30 PM |
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A stock option is defined as a right to buy or sell a stock at a stated price within a specified time. Buyers of stock options are called holders and those who sell options are writers. ‘Call’ suggests an option contract giving the owner the...
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Futures Trading
10 August 2010 8:30 PM |
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All futures contracts are generally made for the purpose of speculation or hedging. As such, the general procedure for settlement is the neutralization of the original contract by an opposite contract on settlement, so that only difference between the current and the contract price is...
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Online Futures Trading
10 August 2010 8:30 PM |
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If one were to look at the history of selling and buying of commodities, then you would see that the idea of trading in futures has been pretty much going on since the concept of trading in goods and produce in agricultural goods began. Farmers...
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Commodity Futures Tradings
10 August 2010 8:30 PM |
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Compared to cash contracts, which require payment against the physical delivery of goods immediately or after a specified period, a futures contract is a special type of agreement made strictly under the rules of a commodity exchange, which may or may not call for the...
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Stock Options Trading
10 August 2010 8:30 PM |
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Speculative activity is carried on stock exchanges through options trading. An option in the stock exchange terminology means ‘a right.’ In an option deal, therefore, the right to buy or sell a certain security within a certain time and at a certain price is purchased...
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Commodity Trading
10 August 2010 8:30 PM |
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Transactions on the commodity exchanges fall into two broad categories: cash contracts and futures contracts. Accordingly, the commodity exchange may be a cash market or a futures market or may combine both. The cash contracts for the purchase of sale of commodities are those which...
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Options Trading
10 August 2010 8:30 PM |
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An option is a contract that gives the buyer the right (but not the obligation) to buy or sell a specified quantity of a given asset, at a specific price, on or before a specified time. Unlike futures trading, the purchaser of an option is...
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Futures Trading Software
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Futures trading software plays an important role in the economics of speculation. Speculation brings about a gradual adjustment of prices to the contingencies foreseen by the speculator. If a speculator foresees that the market situation after six months will warrant a rise in prices, he...
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FX Trading Options
10 August 2010 8:30 PM |
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The FOREX options trading market began as an over-the-counter (OTC) monetary vehicle for large banks, financial organizations, and international companies to hedge against foreign currency exposure. Similar to the FOREX spot market, the FOREX options market is referred to as an ‘interbank’ market. FOREX option...
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Options Contracts
10 August 2010 8:30 PM |
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An option contract gives you the right, but not the obligation, to buy or sell an asset at a price. You cannot buy or sell this asset either at a pre-determined time in the future or any other time till it reaches the maturity. Generally,...