1. Both futures and options contracts are standardized agreements that are traded on an exchange such as ASX (The Australian Securities Exchange, ASX LIMITED, 2014) or CME Group (CME Group Inc. 2014). Options also are traded the over-the-counter market. Moreover, they both have daily settlement and a margin account with a broker is required to trade options or futures. Investors use these financial instruments to hedge their risk or to speculate. The underlying assets for both futures and options contracts can be stocks, bonds, currencies or commodities.
However, options can be exercised at any time before they expire while a futures contract only allows the trading of the underlying asset on the date specified in the contract. And the key difference between options and futures is that options are exactly that, optional. Futures buyer and
…show more content…
Futures buyers and sellers are required to pay a deposit. Option buyers are not required to pay a deposit, because his or she loss will not exceed the premium he has paid, and the seller in exchange-traded options are also pay a deposit, which is the same with futures. Option sellers are required to pay the deposit over the counter depends on the views of the parties.
The last difference is hedging. The use of futures hedging, in the unfavorable risk transfer out, but also the favorable risk transfer out. The use of hedging options when carried out, only the downside risks transferred out and put a favorable risk for themselves.
2. Trading futures contract are sstandardised to ensure that contracts can be simply traded and priced. The standardised term include the amount of the commodity to be delivered, delivery months, delivery arrangements, the asset qualities and the contract size. The purpose of the standardization is to ensure that the futures contracts on an asset are perfect substitutes for each other. This allows for liquidity and parties to a futures contract to get out of positions