Futures and options are among the two types of derivative contracts, which are applied to hedge against risk or to speculate on the future price of an underlying asset. Check how to open demat account. Futures contracts are legally binding agreements to buy or sell an asset at a predetermined price on a specified date. Options contracts give the holder the right, but not the obligation, to buy or sell an asset at a predetermined price on or before a specified date.
Futures and options can be used to build a robust portfolio in a number of ways. For example, a trader can use a futures contract to hedge against the risk of a decline in the price of an underlying asset. Check how to open demat account. For example, a farmer who expects to harvest a crop within six months might sell a crop futures contract at a price he is willing to accept. If the price of the crop falls before harvest, the farmer can still profit from the futures contract.
Options contracts can also be used to hedge risk. For example, a company looking to expand into a new market may purchase options contracts in the new market’s currency. Check how to open demat account. This would give the company the right to purchase new currencies in the future at a predetermined price, regardless of whether the price of the currency rises or falls.
Futures and options can also be used to speculate on the future price of an underlying asset. For example, a trader who believes that the price of a stock is going to rise in the future could buy a futures contract on the stock. If the price of the stock does rise, the trader can profit from the futures contract.
However, it is important to note that futures and options are complex instruments and can be risky. Check how to open demat account. Traders should carefully consider their risk tolerance and investment objectives before using futures or options contracts.
Here are some specific ways to use futures and options to build a strong portfolio:
Risk Hedging: Futures and options can be used to hedge against various risks, including price risk, interest rate risk and currency risk. For example, a company that imports goods from another country might use a forward foreign exchange contract to protect itself against the risk of a decline in the value of its currency. Check how to open demat account.
Future Price Speculation: Futures and options can also be used to speculate on the future price of the underlying asset. For example, an investor who believes that the price of gold will rise in the future can purchase a gold futures contract. If the price of gold rises, the investor can use a futures contract.
Generate Income: Options can also be used to generate income. For example, a trader who owns a stock may sell covered calls on the stock. This would give the buyer of a call option the right to purchase shares from the seller at a predetermined price until a certain date. If the stock price does not exceed the call option strike price by the expiration date, the seller retains the premium received for selling the call option. Check how to open demat account.