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There are many different kinds of derivatives that you can trade either over the counter or on an exchange, whichever you think will yield more profits for you. There are many variations in each kind of derivative.
In this article, we will tackle Finance Brokerage FSMsmart two of the major kinds of derivatives, namely options and swaps. If you’re aiming to make serious money off of the derivatives market, this article is for you. So read on!
Options and its Kinds
Options are contracts that permit but do not carry the obligation to buy or sell an asset. Because of this feature, options contracts are used by investors who do not want to risk a position in an asset outright but want to expose themselves in case of large price movements in the underlying asset.
If you’re planning to trade Forex News options, the following are your choices:
Short Call
If the stock price is going to slump, the call will either be subject to selling or writing. If the call is sold, the buyer of the call (the long call, in his case) controls whether the option will be taken or not. In case you are in the short, you are going to give the control as a seller.
For the writer of the call, payoff is equal to the premier received by the buyer of the call in case there is really a dip in the price of the stock. On the other hand, the writer will lose some money if the stock increases more than the strike price and the premium.
Short Put
If there is anticipation that the stock price will rise, one has to sell or write a put. For the writers of the put, the payoff is equal to the premium received by the stock’s buyer in case stock price increases. When the stock’s price slips beneath the exercise price without the premium, the money is going to be lost.
Long Call
If the stock’s price increases, the right (long) to buy (call) the contract is called a long call. And when the long call is held, there is a positive payoff if the stock price is greater than the strike price by more than the premium paid for each call.
Long Put
If the stock price slips down, the right to sell or put the stock is bought (long). Long put holders get a positive payoff in case the stock price is lower than the exercise price by the premium paid for the put.
Swaps
Swaps are those derivatives where the counterparties exchange cash flow and/or other variable that are linked with different investments. A swap usually takes place as one party has comparative advantage in a certain area while another can borrow more freely at fixed interest rates as opposed to variable.
There are quite a number of swap kinds. The plain vanilla swaps are the simplest ones, and interest rate swaps take place when there is an exchange of fixed rate for floating rate loan by parties.
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