Answer Posted / rajan sevak
Forwards: A forward contract is a customized contract
between two entities, where settlement takes place on a
specific date in the future at today's pre-agreed price.
Futures: A futures contract is an agreement between two
parties to buy or sell an asset at a certain time in the
future at a certain price. Futures contracts are special
types of forward contracts in the sense that the former are
standardized exchange-traded contracts.
Options: Options are of two types - calls and puts. Calls
give the buyer the right but not the obligation to buy a
given quantity of the underlying asset, at a given price on
or before a given future date. Puts give the buyer the
right, but not the obligation to sell a given quantity of
the underlying asset at a given price on or before a given date.
Swaps: Swaps are private agreements between two parties to
exchange cash flows in the future according to a prearranged
formula. They can be regarded as portfolios of forward
contracts. The two commonly used swaps are:
Interest rate swaps: These entail swapping only the
interest related cash flows between the parties in the same
currency.
Currency swaps: These entail swapping both principal and
interest between the parties, with the cash flows in one
direction being in a different currency than those in the
opposite direction.
Warrants: Options generally have lives of upto one year, the
majority of options traded on options exchanges having a
maximum maturity of nine months. Longer-dated options are
called warrants and are generally traded over-the-counter.
LEAPS: The acronym LEAPS means Long-Term Equity Anticipation
Securities. These are options having a maturity of upto
three years.
Baskets: Basket options are options on portfolios of
underlying assets. The underlying asset is usually a moving
average or a basket of assets. Equity index options are a
form of basket options.
Swaptions: Swaptions are options to buy or sell a swap that
will become operative at the expiry of the options. Thus a
swaption is an option on a forward swap. Rather than have
calls and puts, the swaptions market has receiver swaptions
and payer swaptions. A receiver swaption is an option to
receive fixed and pay floating. A payer swaption is an
option to pay fixed and receive floating.
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