Investment Options Part 2

FUTURES & OPTIONS – Futures and options are two types of derivatives. Their structure and the way they work are complicated, and involve leverage. They are high risk and not suitable for inexperienced investors or people who are less risk tolerant.

Futures are financial contracts for underlying assets, such as stock, market index, currency or  commodity. The underlying assets are bought or sold at an agreed price today, for a set date in the future.

Can be bought or sell with a margin deposit, only partly covers the value of the contract. Trading futures is      risky as a broker can make a margin call. This means putting in more cash or securities to cover the                shortfall of margin deposit if the price of the underlying asset moves against expectations.

Options are financial contracts that give the buyer the right to buy or sell an underlying asset (stock,       market index, currency or commodity) from the seller at a set price within a certain time.

Risks and returns of the option buyer and seller are different. If you are the buyer, the maximum loss is   the premium you pay to the seller. If you are the seller, you get the premium. Like futures trading, the   option seller faces the risk of a margin call.

 

STRUCTURED PRODUCTS – Structured products are complex, and embedded with derivatives, where value is based on underlying assets. Some structured products are listed on the stock exchange – derivative warrants and callable bull/bear contracts. Others are unlisted and sold by intermediaries, like banks. These include currency-linked and equity-linked investments. Many structured products are high risk and are not suitable for inexperienced investors.

 

LEVERAGED FOREX – Leveraged foreign exchange is a high-risk investment – You can borrow money to invest in forex, the currency market. You invest in a currency “on margin”, which means you only need to pay a certain amount – usually a small percentage of the contract amount, and you expect that the currency will rise or drop against another currency. Your profit or loss depends on the difference between the exchange rate when you open and close your contract.

 

LEVERAGED AND INVERSED PRODUCTS – Leveraged and inverse products (L&I Products) are derivative products traded on the stock exchange. L&I Products are structured as funds, but unlike conventional funds, they are not intended for holding longer than one day and are designed for short term trading or hedging.

Leveraged products aim to deliver a daily return equivalent to a multiple of the underlying index return e.g. two times of what the underlying index does. Inverse products aim to deliver the opposite of the daily return of the underlying index. The inverse product goes down when the underlying index moves upwards, and the inverse product goes up when the underlying index moves downwards.

Author: Michael Welter

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