Back to the Basics – Derivatives

Futures

 

Buyer of Futures Contract

Seller of Futures Contract

Called the

Long position

Short position

Obligation

Buy the commodity or asset – settlement date

Deliver the commodity or asset – settlement date

Margin account after rise in price of asset/commodity

Credited

Debited

Who Hedges?

User of the commodity/buyer of the asset who needs to insure against price rising

Producer of the commodity/owner of the asset who needs to insure against the price falling

Who Speculates?

Someone who believes that the market price of the commodity or asset will rise

Someone who believes that the market price of the commodity or asset will fall

 

Option

 

Calls

Puts

Buyer

Right to buy – underlying asset @ strike price prior/on expiration date

Right to sell – underlying asset @ fixed price prior to or on the expiration date

Seller

Obligation to sell

Obligation to buy

In the money

Price if underlying asset is above the strike price of the call

Price of the underlying asset is below the strike price of the put

Who buys one?

Someone who

Wants to buy an asset in the future and insure the price will not rise

Wants to bet that the price of the underlying asset will rise

Someone who

Wants to sell an asset in the future and insure the price paid will not fall

Wants to bet that the price of the underlying asset will fall

Who sells to speculate?

Someone who

Wants bet that the market price of the underlying asset will not rise

A broker who is always willing to sell the underlying asset and is paid to take the risk

Someone who

Wants to bet that the market price of the underlying asset will not fall

A broker who is always willing to buy the underlying asset and is paid to take the risk

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