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Futures & options

Harshad Kanekar (Taxation and Accounts Executive) (314 Points)

06 May 2016

Can Any one please explain me Futures & Options Concept. Thanks in Advance.

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Manish Jain (Chartered Accountant) (119 Points)
Replied 26 May 2016

Futures is similar to Forwards Contract. In Forwards you book a contract (say to purchase the goods) today which will be settled on a predetermined future date at the price prevailing today. So in case the price on future date is more than the price booked by you, you have made a profit and vice versa. When Forwards are regulated by Stock Exchanges, they are called as Futures.

Whereas Options are just a right to purchase (Call Option) or sell (Put Option) the shares. You pay premium today to purchase the option at a predetermined price (Exercise Price) on a predetermined future date. There is no obligation created in this case. If you have a Call Option and if the price on future date is more than the Exercise Price, then you'll make a profit by exercising the option and vice versa.

If you have a Put Option and if the price on future date is less than Excercise price, you'll make profit by exercising the option and selling at a higher price and vice versa.