Question

2. What are the differences among a spot contract, a forward contract, and a futures contract?

4. What is the purpose of requiring a margin on a futures or option transaction? What is the difference between an initial margin and a maintenance margin?

8. What is an option? How does an option differ from a forward or futures contract?

13. What factors affect the value of an option?

15. What is a swap?

Answer 1

Following are answer as per serial numbers given in questions.

2. Answer - Spot contract is where underlying asset is deliver on the spot but practically it is done after T+2 that is two days after transaction . It is contact at today's rate for delivery at date of transaction .

Forward Contract : It is contact entered today for delivery of underlying asset at future date at a contracted price for future. in case of forward contracts there in no involvement of stock exchange and there are entered over the counter (OTC) that is contacting parties get involve directly .

For example - Purchase contract of sugar entered today for delivery after 6 month at rate prevailing rate for after 6 month delivery contracts .

Future Contacts - These contacts are same as future except actual delivery of underlying asset is not necessary and these are in entered in stock exchanges between exchange and individual invested and hence has min default risk.

4. Answer - Margins are required to mitigate of eliminate default risk by broker or investor to cover market volatility, since responsibility to honour the contract lies with exchange.

Initial Margin is required initially at time opening any position of either buy or sale in a stock , it is calculated by exchange .

In cases where price drop in a particular stock and commodity significantly than to maintain the level of margin , maintenance margins are called for.

8. Option - In case of futures and forwards , investor or contracting party has honour the contact in future that may be either buy or sale. In case of option , buyer of the option were given with a option to execute contact at agreed value or do nothing .

Options gives their buyer right to buy and sale the underlying asset at contacted price but with no obligation to do the same , while in futures and forwards buyer have both right and obligation to honour contracted terms .

13. Factors affecting option price or value -

--Value of underlying asset .

--Market volatility.

--Time period to maturity .

--Strike price of option

--Market interest rate and dividend

15. Swap is a derivative like options, futures but unlike options or futures it does not derive its value from underlying assets .

Its an agreement between to parties to exchange future cash flows.