Forwards vs Options
Now that Lindsey has given an overview of forwards and futures, he will explain how they are traded by discussing the differences between an OTC contract and an ETD, the difference between a cash and physical settlement and cover how to price a forward trade.
Overview
An OTC contract allows both parties involved to agree to the terms exactly as they please, whereas ETDs are standardised, with set amounts, expiry dates and trading mechanisms. The settlements that occur over these contracts can be via cash or physical, both having their benefits and drawbacks. An option is essentially a one-sided version of the forward contract.
Key learning objectives:
Define OTC and ETDs
Discuss the pros and cons of physical vs cash settlements
What is an option, and when is it exercised?
Summary
Expert
Lindsey Matthews
Lindsey runs Perfordiant, an investment risk and performance consulting firm. He has worked in financial markets since 1992. Lindsey became an MD in fixed income and equities, ran a Risk function, and was on the management team of an Asset Management fintech business. Lindsey is now a Visiting Fellow at the Henley Business School, and resides on the board of CFA UK.
06:10
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