What happens to the cash value of an index contract?
Unless the contract is unwound before expiration through an offsetting trade, the trader is obligated to deliver the cash value on expiry. An index tracks the price of an asset or group of assets. Index futures are derivatives, meaning they are derived from an underlying asset—the index.
What are stock index futures and how do they work?
By their nature, stock index futures operate differently than futures contracts for more tangible securities such as cotton, soybeans, or crude oil. Long position holders of these commodities future contracts will need to take physical delivery upon expiration if the position has not been closed out ahead of time.
Are index futures contracts legally binding?
It's important to note that index futures contracts are legally binding agreements between the buyer and seller. Futures differ from an option, in that a futures contract is considered an obligation, while an option is considered a right the holder may or may not exercise.
What happens when an index contract expires?
Unless the contract is unwound before the expiration through an offsetting trade, the trader is obligated to deliver the cash value on the expiry. An index tracks the price of an asset or group of assets. Index futures are derivatives meaning they are derived from an underlying asset—the index.
What are the advantages of stock index futures?
While futures can pose unique risks for investors, there are several benefits to futures over trading straight stocks. These advantages include greater leverage, lower trading costs, and longer trading hours.
What are the advantages and disadvantages of future contract?
There are many advantages and disadvantages of future contracts. The most common advantages include easy pricing, high liquidity, and risk hedging. The major disadvantages include no control over future events, price fluctuations, and the potential reduction in asset prices as the expiration date approaches.
What is future& options?
Future and Option are two derivative instruments where the traders buy or sell an underlying asset at a pre-determined price. The trader makes profit if the price rises in case, he has a buy position and if he has a sell position, fall in price is beneficial for him.
What is an index futures contract?
An index futures contract is a legally binding agreement between a buyer and a seller, and it tracks the prices of stocks in the underlying index. It allows traders to buy or sell a contract on a financial index and settle it at a future date.
What are some disadvantages of currency option contracts?
The major drawbacks of currency options are as follows:Options must be paid for immediately as and when they were bought. ... There is a lack of negotiability for tailor made options.Traded options are not available in all currencies, although they can be obtained for the major currencies.More items...
What is the operational advantage of futures contract over forwards contract?
While the advantages of options over futures are well-documented, the advantages of futures over options include their suitability for trading certain investments, fixed upfront trading costs, lack of time decay, liquidity, and easier pricing model.
What are options in the stock market?
An option is the right to buy a stock (or other asset) at a specified price by a specific time. Stock options trade on a public exchange. An option has a fixed life, with a specific expiration date, after which its value is settled among investors and the option ceases to exist.
What is option contract in derivatives?
An option is a derivative, a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying asset by a certain date (expiration date) at a specified price (strike price).
What is an IPO in stock market?
When a private company first sells shares of stock to the public, this process is known as an initial public offering (IPO). In essence, an IPO means that a company's ownership is transitioning from private ownership to public ownership.
What is index derivatives contract write its advantages?
Index derivatives allow an investor to trade in a group of assets the index represents, without having to buy each underlying security/ asset in that group or market. Index derivatives include options and futures contracts.
Are index futures securities?
Futures contracts on broad-based securities indexes are not considered securities.
What are the features of future contract?
Features of Futures Contracts | Foreign ExchangeFeature # 2. Standardisation:Feature # 4. Margins:Feature # 5. Marking to Market:Feature # 6. Actual Delivery is Rare: