Asked by AGUSTINA RATNA DWIATI on Jul 17, 2024
Verified
Explain the key differences between an options contract and a forward contract. For each contract, give an example of how it might be used by a firm.
Options Contract
A contract giving the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a specified price on or before a certain date.
Forward Contract
A financial derivative that represents a personalized agreement to buy or sell an asset at a specific price on a future date.
- Acquire an understanding of the differences that set apart financial contracts such as forwards, futures, options, and swaps, including their unique traits.
Verified Answer
DJ
Diana JiangJul 22, 2024
Final Answer :
The key differences are (1) a forward contract obligates both parties to act while the options contract is exercised only if the buyer so chooses and (2) an option premium is paid by the buyer to the seller at the time an option contract is entered whereas there is no such payment on a forward contract. The examples given by students will vary but should illustrate these two key differences.
Learning Objectives
- Acquire an understanding of the differences that set apart financial contracts such as forwards, futures, options, and swaps, including their unique traits.
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