Evaluate Options, Futures, and Swaps

Examine derivative securities: options, futures, and swaps. Investors and financial institutions that make use of these derivative securities to take positions are either speculators or hedgers. Speculators are attempting to predict the direction of some economic or market variable and generate gains on those predictions using derivative securities. Hedgers will have a specific operational risk that could be transferred using these derivative securities.

A call option is the right to buy an asset at an agreed-upon exercise price. A put option is the right to sell an asset at a given exercise price. American-style options allow exercise on or before the expiration date. European options allow exercise only on the expiration date. Most traded options are American in nature. Options are traded on stocks, stock indexes, foreign currencies, fixed-income securities, and several futures contracts. Options can be used either to lever up an investor’s exposure to an asset price or to provide insurance against volatility of asset prices. Popular option strategies include covered calls, protective puts, straddles, spreads, and collars.