Other financial instruments

Options

Theoption’s buyer has the right to buy or sell given financial instrument (base asset, e.g. share) on a stipulated price (the strike price). Option that gives its owner right to purchase the base asset is called call option, while the option that gives right to buy it is the put option. More complicated investment strategies include the simultaneous purchase and sell of options. 

The advantage of options over direct purchase is their flexibility – the holder can pick the strike price and choose whether to use the option at the maturity date (in view of the spot price). There are two types of options depending on the moment at which they can be used: European (used only at the maturity date) and American options (used at any time before the maturity date). Market scenarios depend on the ownership of the base asset. Whether the option is purchased or sold determines the potential profit. The purchase of an option theoretically gives unlimited profit opportunities. The potential profit for the buyer is the difference between the usage price of the option (current market price of the base asset) and the spot price of the base asset at maturity. The premium, paid for the option, has to be subtracted from the calculation.

The potential profit for the seller of the option is limited to the received premium. The risk also depends on the fact whether the option is sold or purchased. The maximum potential loss for the buyer of the option is theoretically unlimited. It equals the difference between the current market price and the spot price of the base asset having in mind that the premium has to be added.

Futures

Futures contracts are defined as purchase/sell agreements whereupon a given asset (real or financial) is exchanged and settled on a stipulated price at a later stipulated date. The buyer of the futures contract is obliged to accept the asset and pay the stipulated price when the time comes while the seller is obliged to provide the specified asset quantity.

Swaps

Interest swap is a contract for the exchange of stipulated interest payments in a given currency for a given period. There are two main types:

-         Coupon interest swap – exchange of interest with fixed rate for variable one.

Base swap – exchange of variable interests founded on different bases.