Given a company\'s scenario, develop a plan (including the use of options contra
ID: 2659166 • Letter: G
Question
Given a company's scenario, develop a plan (including the use of options contracts) to reduce the impact of various types of risk faced by the firm. TCO F: Given a company's current capital structure, evaluate the advantages and risks of using various types of derivatives (including preferred stocks, warrants, convertibles and/or options) to manage, control, minimize or prevent those risks. The discussion question this week is how do forward contracts differ from futures contracts? How do both of these differ from options contracts? Please research, avoid investopedia and regurgitation, and provide in-text citations and references in the APA format.
Explanation / Answer
Futures refers to a contract with both sides risks. suppose u entered into a F+ contract wih repsect to a stock. F+ stands for upside betting from the stock price. if the prices goes up then u gian and if it goes down you have to pay. it is regularised by a regulatory bode like SEBI in India.
Forward contract on the other habd is a non standardised contract where u entered into a contract with a third party like bank ec., which involves a default risk unlike in future contract. forward contract means a contract to pay or acept any currency stock at the forward dat with a predetermined price.
Options on the other hand is a contract in which by paying premium u restict yurself to the one side risk. suppose u entered into a call option with respect to a security. Call option implies that u have a beief of stock price going upwards and hence u pay premium in respect to the call option. if the price goes up from the strike price u gain and if the pric goes below the strike price ur loss is only the upfront premium u paid in respect to the call option. similarly it stands for put option.
On the basis of risk element we can rank the above derivative instrument as follows:
1) Future
2) Options
3) Forward.
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