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:

When you enter a futures contract, you don't typically exchange money for the full value of the asset upfront. Instead, you put up a small percentage of the contract's value, called initial margin. This acts as a good-faith deposit.

Throughout the life of the contract, your margin account is "marked to market" daily. This means that at the end of each trading day, your account is credited with profits or debited with losses based on the day's price movement. If prices move against you significantly, you might receive a margin call, requiring you to deposit more money to maintain your margin level.

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 price an option, you're trying to determine its fair value. This isn't just about what the option could be worth at expiry, but also what it's worth right now given all the uncertainties. Options have two main components to their price: intrinsic value and extrinsic value (or time value).