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1 Introduction The world of futures and optionsA Explanation of futures contractA Explanation of options contractC Intrinsic value and time value of contracts4 Conclusion Risky investments Futures and options are very similar financial investmentsBasically these two investments are the result of financial uncertainty They are used for speculation and for hedging against losses from other areasA futures contract is the right to buy or sell some commodity or financial instrument The purchase or sale occurs sometime in the future The date of the sale or purchase is fixed and this is the settlement date The price of the sale or purchase is also fixed at the time the contract is purchased The purchaser of the contract must buy or sell the commodity or financial instrument by the settlement date Euromoney 80For example an importer in the United States may have a billdue in England in 90 days The importer will need British pounds to pay the bill In order to stabilize his business he needs to know now how much this will cost him in dollars To do this he purchased the right to buy pounds in 90 days The price in dollars is fixed now Whether the exchange rate goes up or down does not matter anymore The importer has essentially fixed the exchange rate for his future debt This may not always work out to his advantage If the dollar goes up in value during the 90 days he has probably paid too much for the pounds The price he fixed today would probably be lower in 90 days That is it would take fewer dollars to purchase pounds in 90 days than the rate in effect when he took out a future contractWhere there is uncertainty about what the value of the contract will be on the settlement date options may be a better deal An option is similar to
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