Can someone explain what are futures, options and swaps?
In: Economics
They are 3 great ways to make your money disappear or appear on the stock market.
In futures and options – you make a “promise” to buy a stock or commodity at a certain price on a certain date in the future. Now on that date, if the market price of the stock or commodity is higher than your promised price – then you win (and you get to buy the stock or commodity at the erstwhile promised price). Now if that price is lower – hard luck – you need to break your piggy bank and buy that damn thing if you have a futures contract or you can refuse to buy it if its an option contract (but for the option contract you need to pay some money upfront (called the premium) – which is the money that disappears if you choose not to buy it).
Swaps are those where you exchange your contract (can be for a loan) with another entity. So you become responsible for the other entity’s contract terms of payment and they become responsible for yours. Swaps happen at institutional levels and not at retail levels.
Latest Answers