Quantitative Analysis and Investors

¶ … Derivative Market Derivatives are defined as the investment products derived from or dependent on the underlying assets. The derivatives are the contracts between two or more parties with reference to the underlying assets, and its value depends on the fluctuations of the assets. Most common type of underlying assets are bonds, stocks, currencies, commodities, market indexes, and interest rates. The objective of this paper is to explore the concept derivatives and evaluate the future markets and options markets.

Advantages and disadvantages of the Futures Markets and Options Markets Future markets and options markets are the derivatives instruments that derive their values from instruments or assets. Both options and futures have their advantages and disadvantages. An advantage of an option contract is its ability to provide buyers or sellers the right to buy or sell a financial instrument or asset at a fixed price. The method assists buyers to limit their maximum risks to the premium paid.

Moreover, options assist investors to gain access to many underlying assets in an inexpensive way without buying the stocks. Moreover, options assist in limiting losses. The disadvantage is that when the option contract expires, they may be worthless. Moreover, a diversification of stocks may not eliminate the systematic risks in the option contract. (John, 2011). The advantage of future is that it is one of the great ways to trade some investments such as indexes, currencies, and commodities.

The standardize features and high levels of leverages features of future options make them very useful for risk tolerance investors. High level of liquidity is another benefit of future contracts. Their liquidity is often remarked in the traded currencies, commodities and index. A major disadvantage of a future contract is that the leverage can carry high risks because of fluctuation of contract values. Lack of control over a future event is another disadvantage. 2. Differences between "Long" or "Short" Position.

In term of stocks, a short option is a position of investors who owe shares while the long position is the investors who owned shares. For example, an investor who owns 500 shares of a particular stock is said to have 500 long shares is trading in long option since this investor has paid the full costs before owning these shares. However, an investor who sells shares of a particular stock without owning these shares is trading in short option. A long position is bullish while short position is bearish.

Typically, short investors borrow a particular number of shares from a brokerage firm based on a margin account with the hope of reaping profits when stock prices fall. The rewards of a long call option are that it assists investors who purchase a call to reap profits when the stock price rises. Moreover, investors can record profits by selling the put when the underlying asset values increase.

A short option investors are able to reap the profits from the stocks devaluation by buying at lower prices later sell them at higher prices. The risks of the short option are higher than the long options. The investors in short option contract can lose part or the entire investment if the value of the stocks bought do not increase. Moreover, long short investors can lose their premium if the prices of the stocks do.