A futures contract is the conclusion of a transaction that has a settlement in the future under conditions set today. An option is a contingent futures contract, that is to say the conclusion today of a transaction that could develop in various ways according to various outcomes on the result of which the transaction depends. One such option, the simplest, is the option to buy or a call. This is a contract between say a bank and a client giving the client the right, but not the obligation, to buy at date T (perhaps 3 or 6 months), specific shares or a currency at an agreed price K, even if the price of these shares or currency is greater than K at the date T. The possession of an option is clearly an advantage to the client. The client may be a business where the expenses and income are seasonal and delayed. For example, a French business that buys oranges in winter in dollars and sells orange juice in summer in euros will see that the annual balance sheet is extremely dependent on the fluctuation of the dollar in relation to the euro between winter and summer and between summer and the following winter1. In the summer it could take up an option to buy in dollars in six months time which would give it a sort of insurance against the variation of prices.
KeywordsOrange Juice Future Contract Barrier Option Derivative Market Hedging Portfolio
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