Futures and options are special types of financial agreements called “derivatives.” They don’t have their own value but get their worth from real things like stocks, currencies, or commodities (like crops, oil, and gold). Since the prices of these things change all the time, traders can lose a lot of money. To protect themselves from losing money, they use derivatives as a shield, or “hedging” tools. Some people also use these products to try making money from price changes.
What Are Futures?
A future is a promise between a buyer and a seller to exchange something at a fixed price on a specific date. Both the buyer and seller must stick to this agreement when the date comes. Because futures are leveraged, traders only need to pay a portion of the total price upfront, known as a “margin.”
For example, imagine a farmer who agrees to sell 1,000 kg of onions for Rs.50 per kg in January. If the price drops to Rs.40 before January, he would normally lose money. But since he locked in the price early, he’ll still sell at Rs.50, making a profit instead.
What Are Options?
Options are also agreements between buyers and sellers, but there’s a big difference. The buyer of an option can choose whether or not to go through with the deal, while the seller has to follow through if the buyer decides to. The seller charges a small fee called a “premium” for this choice.
There are two kinds of options:
– Call Options: This gives the buyer the option to buy something at a set price before a certain date.
– Put Options: This gives the buyer the option to sell something at a set price before a certain date.
In short, futures are like binding promises, while options are like choices. These tools can be complex, but understanding them can help protect you from risks and even allow you to profit from market changes!
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