14. Options and Futures Market

Chapter 14



by: josavere

The Futures and Options Markets are constituted by private entities whose objective is to establish, register, guarantee and settle the negotiation of correlated contracts; in futures, there is an obligation to buy or sell at the agreed price on the established date; in the options the right is acquired, not the obligation. They are financial instruments designed to help traders reduce risk and are commonly known as “financial derivatives”, namely:
Futures, Forward, Options, Indebtedness in dollars, Exchange rate swap and OPCF.
The Futures Markets operate for hedging, speculation or arbitrage purposes. They make it possible to secure the sale or purchase price of raw materials with the services of a commission agent that is listed on the stock exchange; a guarantee is required to avoid damages for the parties and thus the breach of one of the participants is supported.
Financial futures are traded in official and organized markets; very similar to stock markets with abundant liquidity, in most contracts; It provides the possibility of leaving the position before the agreed term expires.

Acquiring a contract in the futures market is not always conditional on the physical acquisition of the purchased asset; may be incorporated by the gains or losses that may arise during the established validity period since the price of futures evolves in a similar way to the underlying asset (a material good such as gold or coffee) or a financial good (such as the shares of a certain company or a currency) that has a price in the market, depending on its price at any given time. Financial profits or losses are settled daily, so it is not necessary to reach expiration to finalize the investment, since the opposite operation can be done to close the negotiation at any time prior to the expiration of the contract.

Of all the assets with which traders or investment managers can operate, futures are the most used option due to speed, leverage and costs. As they are done with standardized contracts, the terms are standardized and with characteristics previously set by the market, which makes it easier for investors to act according to the downward and upward trends to buy and sell transactions. Currently these negotiations are carried out in stock markets.
Forward Options offer financial alternatives through term operations when market conditions are uncertain and volatile; knowledge and the correct use of these tools provides confidence and gives financial peace of mind. Because they are OTC (over the counter) operations, Forwards are completely flexible. The conditions of time, amount and method of compliance can be adjusted to the needs of the entrepreneur and can be negotiated at any time.
It consists of an agreement between two entities (natural and/or legal) committing themselves, one to sell and the other to buy an asset, called the underlying, at a price and on a future date according to the conditions set in advance by both parties. The term option refers to an agreement by which the buyer is granted, for a price (premium), the right (not the obligation) to buy or sell an underlying asset for a price and on an agreed date. Whoever sells the option has the obligation to sell or buy the underlying asset; the buyer has the option to exercise it or discard it.

The use of options or futures always carries risk, and the parties must be well aware of the eventualities that may arise. An option grants rights to the holder of the contract, while a futures contract obligates the two parties to enter into a transaction.

Futures trading is done only through exchanges and commonly electronically. Options contracts are established off-exchange; to celebrate it, the two parties must reach an agreement to make it bilateral. Holders of a futures contract are required to participate in the agreed exchange.

Whoever buys in an options contract, the most that can be lost is the initial investment plus the transaction costs. If you sell covered call options or call options on the assets traded, your loss is limited to the appreciation of the underlying securities less the premium earned on writing the call options.

Financially, it is about minimizing the possible loss that may occur due to a drop in the price of an asset in which we have invested. You must take a position opposite to the one you want to cover, so that the results of both are compensated.

The price of the futures evolves in a similar way to that of the price of the underlying asset; in case of deviations, the arbitration of the position with the cash comes into play.

When operating in financial futures, guarantees must be deposited to avoid damage to both the buying and selling parties. Of all the assets that traders or investment managers can trade, futures are possibly the most efficient option, due to speed, leverage and costs. When declared through standardized contracts, the terms are standardized and with characteristics previously set by the market.

The declaration of the price in advance and a good handling of speculations, helps the participants to act according to bearish and bullish trends to buy or sell contracts at their convenience.
The swap is a contract in which two counterparties agree to exchange obligations or cash flows in order to achieve a benefit on interest rates or the profitability of a financial operation. Like other financial derivatives, the swap is frequently used as a means of hedging against risk; they are agreed for the specific needs of the parties involved, so their market is not standardized and is considered over-the-counter or secondary (OTC). They can be interest rate, currency or credit default.

The Opcf are transactions for the sale of contracts on stock indices, currency indices or profitability indicators, in which their price can be agreed on a future date. When it is the date of fulfillment of the contract, the operation ends with the delivery of the difference in money between the price agreed in the forward operation and the market price of the index. If the market price is lower than the agreed price, the buyer pays the seller the difference between the two values. On the other hand, if the market price is higher than the agreed price, it is the seller who pays the buyer.

These operations are carried out on the stock exchange based on the DTF and the representative market rate (TRM). Opcfs provide investors with a tool through which they can better manage their portfolios. For their part, the Opcf on the TRM will allow exporters, importers and, in general, all entities that have assets or liabilities in dollars to reduce the risk to which they are exposed due to fluctuations in the TRM.





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