Options and Futures

Running head: OPTIONS AND FUTURES
Options and Futures
Name of the Student:
Name of the University:
Author’s Note:

1OPTIONS AND FUTURES
Table of Contents
Answer to question 1:.................................................................................................................2
Part a:.....................................................................................................................................2
Part b:.....................................................................................................................................3
Part c:.....................................................................................................................................3
Answer to question 2:.................................................................................................................3
Part a:.....................................................................................................................................4
Part b:.....................................................................................................................................4
Part c:.....................................................................................................................................4
Part d:.....................................................................................................................................4
Part e:.....................................................................................................................................4
Answer to question 3:.................................................................................................................5
Answer to question 4:.................................................................................................................6
Part a:.....................................................................................................................................6
Part b:.....................................................................................................................................6
Answer to question 5:.................................................................................................................7
Part a:.....................................................................................................................................7
Part b:.....................................................................................................................................7
Part c:.....................................................................................................................................7
Answer to question 6:.................................................................................................................7
Answer to question 7:.............................................................................................................8

2OPTIONS AND FUTURES
Part a:.....................................................................................................................................8
Part b & c:..............................................................................................................................8
Part d:.....................................................................................................................................8
Part e:.....................................................................................................................................8
Part f:......................................................................................................................................8
Part g:.....................................................................................................................................8
Part h:.....................................................................................................................................9
Part i:......................................................................................................................................9
References and bibliography:...................................................................................................11
Answer to question 1:
Part a:
Over the counter transactions entered into two or more parties without the
intervention of the exchange. Therefore, derivatives transacted in an over the counter market
is known as over the counter derivatives. There is no standardised form of products and
standard contract volume in the over the counter market. Hence, tailor made size of the
derivatives can be transacted in the over the counter market. Over the counter market is less
regulated and it has a higher degree of counter party default risk. Hence, there are certain
points which are affected by the high volume of the over the counter derivative.
Derivative products derive value from the price of its underlying assets, these are cash
settled in nature. In other words these are one type of bet based on the expectation of the

3OPTIONS AND FUTURES
parties about the price movement of certain underlying assets. Therefore, these are bilateral
contracts in nature without having sufficient collateral underlying assets.
As much as the size of the over the counter derivative market, the degree of counter
party risk is higher and might be the cause of economic destruction. Some authors describes
the over the counter derivatives as the weapon of economic destruction.
As the over the counter derivatives are settled in a future date, participants might
mischief the information and pricing of the underlying assets to gain a benefit from the
contract, which can be disastrous for the economy when the size of the market is too big.
Part b:
Over the counter derivatives market are less regulated in nature and transactions are
entered into by the parties directly without any interference of any exchange. The most
important risk in the over the counter party derivatives market is the counter party default
risk. If a participant seems that the exercise of the contract may lead to a huge amount of loss
to them, then they may not exercise the contract thereby incurring a loss to the counter party.
Another important risk in the over the counter derivatives market is the high bid ask spread of
the stock prices, leading to a very difficult profitable trading in derivatives products in the
over the counter market.
Part c:
Large size of the over the counter derivative market is dangerous for the economy as
well as the society as a whole. As there is no collateral securities for derivatives in the over
the counter derivatives and a high degree of counter party risk may become destructive for
the economy as a whole. Therefore, there is a need for more improved regulation system for
the over the counter market.