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Financial derivatives

A stock when it is first issued provides funds for a company. Is the same true of an exchange-traded stock option? Discuss.

Explain the link between options, futures and forward contracts.

Explain why a futures contract can be used for either speculation or hedging.

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A stock, when first issued or via the initial public offer in the primary market, offer funds to the company as company's promoters dilute their holding/shares in the company and offer shares to the company. It is not same as exchange-traded stock options such as calls and puts because these are derivative securities for speculation/hedging being traded over the stock exchange by investors/traders. Stock options are instruments being traded over the secondary markets and not used for fund raising in the primary market.

Explain the link between options, futures and forward contracts.

Let us first understand relationship futures and forward. The price of ...

Solution Summary

Financial derivatives: explain the link between options, futures and forward contracts

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