In recent years the volatility of prices in financial markets has increased. Stock prices, bond prices, interest rates, foreign exchange rates are all subject to considerable fluctuations. The response of financial markets has been to innovate an extensive range of “products” each of which has a role in protecting investors and firms from the risk of fluctuations in market prices. Forward contracts have for a long time been popular instruments for hedging foreign exchange risk. They are now used extensively (in the form of swaps) in the hedging and transfer of interest rate risks. Futures contracts which have been traded on commodities for many years have now become very popular for stock indices (S & P FTSE) bonds (Eurodollars, US.T. Bonds, UK GILTS) and currencies. Options both in a traded form (on stocks and currencies) and in a more traditional “over the counter” mode, in the case of interest rate and swap options have also become very significant in recent years. The essential difference between futures and options contracts is that options provide an insurance against adverse movements in a price while allowing the investor to benefit from positive movements Futures on the other hand allow the investor to lock in a future price for his sale or purchase.
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