Is anybody else struggling with forwards/futures? They seem similar to options, but I’m not too certain… Options make perfect sense to me and maybe its because I deal with them everyday (discount brokerage); however, I’ve never dealt with forwards/futures and the terminology is killing me…
Futures/Forwards relate to commodities usually. Options relate to equities.
ACK. That’s not close to the truth - financial futures are much bigger than commodity futures. Interbank currencies are traded as forward contracts and that market does more daily volume than the open interest in all commodity futures in the world. Options are vastly broader than equities. Options are very liquid on futures contracts, equity indices, currencies, T-bonds, etc… Options are also embedded in oodles of classes of securities especially most of the bonds in the world. Most business decisions can be viiewed as implicit options and can be valued by thinking about option valuation models.
Options are similar to equity in terms of your liabilities: Once you’ve bought them, no other cash outflows will be required from you if you don’t want to. Futures, on the other hand, are contracts that may force you to make a payment in the futures if you are on the wrong side. Hence your loss in this case can be greater than the initial outlay. Forward are contracts that fix a transaction price in the future. No payment is made up front. It’s like the contract you sign with your employer. The wage to be paid in the future, once the work is done, is determined ahead of time.