What is meant by forex trading?what is meant by futures and options?
Question:
Answer:
So i guess you know what forex trading is.
Futures and options and forwrds, the easiest, are a kind of derivatives. Derivatives are a financial instrument whose value derives form the value of other, more basic underlying assets.
Now, forwards are contracts in which the price of a commodity or currency is set for the future. It has to do with expectations of the market, and how the market thinks, based on information today, the price of those commodities or currencies will be in a certain date.
Lets say the exchange rate of mexican pesos for us dollars today is $11.09. That´s the spot exchange rate. Now, lets say you and i agree that in june 2006, im your gonna sell me american dollars at an exchange rate of $11.1828. If my expectation is the peso will be higher, im gonna make a deal with you. So, the future of the pedo, for june 2006 will be $11.1828. Imagine our deal, but not made between us, but between thousands of dealers, in the Chicago MArket.
Companies use futures a lot as a way to protect themselves. I believe in english its called hedging. If an american firm sells water tanks to a firm in France, but the payment isnt due untill 45 days later, both companies would like to agree to make the exchange of euros for us dollars at a future exchange rate. That way they now exactly how much they owe or get. The same with commodity prices. A future of the price of oil is nothing more than a contract agreeing on the future price of the transaction. Funny thing is, you and i can agree on an oils future contract, where im selling and your buying, but the barrel of oil is never transacted. What we do is, lets say the future price of oil for august is $73 usd. im selling, you are buying, and we agree on that price. Come august 31st, the real price of oil is $78 usd. since you are buying, you win $5 bucks per barrel right? And i lose % per barrel... so instead of giving you a barrel of oil you cannot even store, i just give you $5 per barrel. _If the real price had been $65, i would have won $8 per barrel, and you lose $8 per barrel.
The same with futures. MAjor difference with forwards is that an exchange of assets is required. Contracts are pretty much standarized. The delivery, kind and quality of product, etc is all defined. Largest exchanges are made in the Chicago Board Trade. Futures include a los of prodcts... live cattle, sugar, coffee, gold, cooper, aluminium, etc.
Options are a little bit harder. There are 2 basic type of options: call options, giving the holder the right, option, to buy an asset at a certain date at a certain price. Put options, giving the holder the right, option, to sell an asset at a certain date at a certain price. For example, lets say i buy a call option to buy in 3 months stock of yahoo. The actual price is, just an example, $10 bucks, and my call option gives me the option to buy at $12. The price to buy that option for 1 share of yahoo is worth $1. If 3 months pass, and the price of the stock is $11, i certainly wont take my option to buy the stock and lose $1, the initial investment on the option. But if the real price is $15, im going to take my option, buy the stock at $12 and sell it at $15, earning $2.
Just be careful cause there are american options and european options... european options can only be excersied at the end of the contract, ehile american options can be excercised whenever in the life of the option.
You seem to have answered your own question. Forex or FX trading means trading foreign exchange or foreign currencies. Futures means you're trading something that will get delivered at some date in the future. For example, you might buy a future that allows you buy 10 Euros in 3 months but you've locked in the price at today's prices, adjusted for the time factor.
Options allow you to trade a given security at a future date for a certain price. So, you may be able to buy 10 Euros at 1.18 each in 3 months.
More Related Questions & Answers...