Options, derivatives, futures and forwards — 6-topic bundle

Financial markets are places where financial assets can be bought and sold. They're essential for the global economy, providing liquidity, price discovery, and a way for businesses to raise capital and for individuals to invest.

A forwards contract is a non-standardized agreement between two parties to buy or sell an asset at a specified future date for a price agreed upon today. Unlike futures, which are exchange-traded and standardized, forwards are over-the-counter (OTC) instruments, meaning they are privately negotiated.

Here's what makes them tick:

A futures contract is a legally binding agreement to buy or sell a specific quantity of an underlying asset at a predetermined price on a specified date in the future. These contracts are highly standardized, meaning the asset quality, quantity, delivery location, and settlement procedures are all fixed. This standardization allows them to be traded on organized exchanges.

Here's why they're important:

Options are financial derivatives whose value is derived from an underlying asset, like a stock, commodity, or index. They're contracts between two parties: a buyer and a seller.

Photo by Hanna Pad on Pexels

Photo by Rafael Minguet Delgado on Pexels

When you're trying to price an option, you're essentially calculating its fair theoretical value. This value comes from a combination of intrinsic value (how much it's "in the money" right now) and extrinsic value (also called time value). Extrinsic value accounts for the potential for the option to become more profitable before it expires.

The key factors influencing an option's price are often called the "Greeks" but let's just focus on what they represent: