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Futures and Options Contracts

Make a Power Point with details about the differences between using futures contracts and options contracts in order to reduce risk.

- Are there any advantages to using one of the instruments over the other
- Is one of these more effective than the other?
- Are the costs of each different?
- Calculate how many call options contracts would be needed if you were trying to hedge a portfolio of 200 shares of stock.
- Please give concrete explanations of each and also make examples where it would be more appropriate to utilize an options contract over a futures contract and vice versa.

Solution Preview

Are there any advantages to using one of the instruments over the other?

A futures option carries an obligation to buy or sell on an agreed date. An Option contract has the right but not the obligation to buy or sell over a period of time and sets a strike price. The advantage of a futures contract would be that the buyer could take advantage of increasing value of a commodity. An Options contract would be best when used to set the price for the future and could counteract a bear market and protect from losses.

Is one of these more effective than the other? Are the costs of each different?

Effectiveness of the option would depend on the market and the buyer can hedge ...

Solution Summary

Concrete explanations of Derivatives, Options Contract, Future Contracts, Derivative Differences, Derivative Risk. Examples of appropriate options contract over a futures contract and vice versa.

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