Options and futures are derivatives from "summary" of Loose Leaf Finance with Connect Access Card by Troy Adair,Marcia Millon Cornett,John Nofsinger
Options and futures are financial instruments known as derivatives. These instruments derive their value from an underlying asset, such as stocks, bonds, commodities, or currencies. Derivatives like options and futures are widely used in financial markets for hedging, speculation, and arbitrage purposes.
Options give the holder the right, but not the obligation, to buy or sell an asset at a specific price within a specified period. There are two types of options: call options and put options. A call option gives the holder the right to buy an asset at a predetermined price, while a put option gives the holder the right to sell an asset at a predetermined price.
Futures, on the other hand, are contracts that obligate the buyer to purchase an asset or the seller to sell an asset at a specified price on a specified future date. Futures contracts are standardized and traded on organized exchanges. They are often used by investors to hedge against price fluctuations in the underlying asset.
Both options and futures allow investors to leverage their investments, meaning they can control a larger position in the underlying asset with a smaller amount of capital. This leverage can amplify both gains and losses, making derivatives a high-risk investment.
Derivatives like options and futures are complex financial instruments that require a good understanding of the underlying assets and the risks involved. Investors should carefully consider their risk tolerance and investment objectives before trading in derivatives. Understanding the characteristics and mechanics of options and futures can help investors make more informed decisions in the financial markets.
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