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Options and Futures
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Derivatives | Definition, Types - Forwards, Futures, Options, Swaps, etc
Corning Gorilla Glass TougherTogether. Great Manager Awards. We are committed to providing you with industry-leading content, but cannot do so without your help. Please disable your Ad Blocker for TradingCharts. Click on any of the following market terms or phrases to see the definition: A Actuals arbitrage at-the-market at-the-money. B Basis basis grade bear bid breaking bulging bull buy on close buy on opening. D-E Day orders delivery delivery month delivery notice differentials. F-K Financial futures fundamental analysis futures contract futures commission merchant futures funds hedge in-the-money index futures intrinsic value.
L Limit limit order liquidation local long. M-N Margin margin call mark-to-market market order nearby net position. O Offer on opening open contracts open interest open order opening options on futures opening price out-of-the-money. P-Q Pit point position premium price limit purchase and sale statement put.
R Range ratio hedging reaction round-turn round-turn commission. S Scalping settlement price short speculator spot commodity spot price spread striking price. The underlying can either be a physical asset or a stock. The loss or gain of a particular party is determined by the price movement of the asset. If the price increases, the buyer incurs a gain as he still gets to buy the asset at the older and lower price. On the other hand, the seller incurs a loss in the same scenario.
For a detailed understanding, you can read our exclusive post on Forward Contract. Swap can be defined as a series of forward derivatives. It is essentially a contract between two parties where they exchange a series of cash flows in the future. One party will consent to pay the floating interest rate on a principal amount while the other party will pay a fixed interest rate on the same amount in return.
Currency and equity returns swaps are the most commonly used swaps in the markets. Exchange traded forward commitments are called futures. A future contract is another version of a forward contract, which is exchange-traded and standardized. Unlike forward contracts, future contracts are actively traded in the secondary market, have the backing of the clearinghouse, follow regulations and involve a daily settlement cycle of gains and losses.
Commodity Market Futures & Options Terms & Definitions
Contingent claims are contracts in which the payoff depends on the occurrence of a certain event. Unlike forward commitments where the contract is bound to be settled on or before the termination date, contingent claims are legally obliged to settle the contract only when a specific event occurs. Contingent claims are also categorized into OTC and exchange-traded contracts, depending on the type of contract. The contingent claims are further sub-divided into the following types of derivatives:. Options are the type of contingent claims that are dependent on the price of the underlying at a future date.
Unlike the forward commitments derivatives where payoffs are calculated keeping the movement of the price in mind, the options have payoffs only if the price of the underlying crosses a certain threshold.
Options are of two types: Call and Put. A call option gives the option holder right to buy the underlying asset at exercise or strike price. A put option gives the option holder right to sell the underlying asset at exercise or strike price. Options where the underlying is not a physical asset or a stock, but the interest rates. It includes Interest Rate Cap, floor and collar agreement.
Further forward rate agreement can also be entered upon. Warrants are the options which have a maturity period of more than one year and hence, are called long-dated options. These are mostly OTC derivatives. Convertible bonds are the type of contingent claims that gives the bondholder an option to participate in the capital gains caused by the upward movement in the stock price of the company, without any obligation to share the losses. Callable bonds provide an option to the issuer to completely pay off the bonds before their maturity.