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Futures and Options

Discuss Futures and Options within the Financial Management ( FM ) forums, part of the Resolve Your Query - Get Help and discuss Projects category; Derivatives occupy a very significant place in the field of finance and are virtually driving the global financial markets of ...



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Futures and Options
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Sunanda K. Chavan
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Futures and Options - October 8th, 2010

Derivatives occupy a very significant place in the field of finance and are virtually driving the global financial markets of the day. Futures and options exchanges are an integral part of virtually all the advanced economies. Many more countries like India are in different stages of the process of introduction of such trading.


Futures have revolutionized the global commodities and financial markets ever since their advent. Futures are only a more developed form of forward trading. A futures contract involves honouring of a commitment between the buyer and the seller regarding delivery by the seller of a specified commodity or instrument after a specified period at a specified price.

The price of a futures contract is market related and is linked to the projected spot price of the underlying asset on the delivery date. The futures market provides economic and social benefits through their functions of risk management and price discovery.


Option contract helps the investor get returns on his investment while remaining fully insured against any adverse movement in stock prices. Option is a legal contract in which the writer of the contract grants to the buyer, the right to purchase from or sell to the writer a designated instrument or a scrip at a specified price within a specified period of time. The writer is legally obligated to perform according to the terms of the option but the buyer is under no obligation to exercise the option.

Broadly, options are of two types i.e. a call option and a put option. Price of an option depends on factors like stock price, expiration date, stock volatility, exercise price, etc. The complexities of the corporate risks and their management gives rise to many solutions through a series of innovative strategies in the form of combinations of options of different types. Most commonly used are spread strategies, straddle, strip, strap and condors.

Introduction of futures and options in India is the beginning of a new era. Both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have introduced trading in stock index futures and stock options. Trading in stock index futures commenced in June 2000, but trading in stock options began only in July 2001.

But however, derivatives trading in India has not picked up as expected. There are a lot of myths attached to it and the general lack of awareness among brokers and investors have led to very low volumes in trading.

However, these are early days and the experience of the world market has proved that futures and options are going to be the trading instruments in the future.

So come, Make Your Future With Options!!!
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