Option Contracts

The Use of Options Contracts in Different Financial Transactions

The Use of Options Contracts in Different Financial Transactions

An options contract is an agreement between a buyer and seller that gives the purchaser of the option the right to buy or sell a particular asset at a later date at an agreed upon price. Options contracts are often used in Derivatives Securities, Commodities, and Real Estate transactions.

Option Contracts

Option Contracts

Derivatives Securities

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros.

Commodities

Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.

Real Estate

A type of financial product that fluctuates in value depending on the changes in the value of a real estate asset, usually an index. Property derivatives provide investors with exposure to a specific property market without having to buy and sell actual buildings.

Brian Donaldson

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