Forward Contract/Futures
I am a student studying currently studying derivative theory. I've encountered the idea of a forward contract/futures. If I understand correctly, the buyer of a forward contract agrees to purchase x amount of stock at price K at time T. What is the point of this and how is it any different from just purchasing x amount of stock at price K' right now, where K' discounts for interest rate. Compared to options, where you are essentially buying the right to delay a choice (exercising the contract or not), a forward contract gives you no choice, so what is the difference in buying later versus now?
I understand perhaps in reality this makes a difference as you may expect to have more cash in the future that allows you to complete the contract (which you don't currently ahve the cash to complete). However, purely theoretically speaking, you can simply borrow the money.
So, is there a theoretical difference between buying a stock now versus forward contracts/futures, or is the difference purely practical?
I think one advantage is that futures contracts can give you leverage similarly to options contracts, however there is no upfront cost to the position. If you just buy the stock, you get no leverage, and if you buy an option, you have to pay a premium up front, so the futures contract has some benefits. Could definitely be wrong here though.
I'm not sure exactly what you're asking but can give two reasons why a PM may want to use futures instead of underlying. Index futures for example only require a small upfront collateral and allows you to gain equity exposure without using up your cash. So typically used to maintain exposure and manage cash. They're also very liquid.
Single stock futures allow you to get around %ownership limitations. Maybe you don't want to trigger disclosure requirements or mandatory offer etc depending on the jurisdiction.
There is no second future cash payment for a futures contract. It's not an unconditional option - the holder gets delivery of the underlying or cash payment at expiry with no strike price needing to be paid. As the buyer you really are just paying K' right now for delivery of the underlying/national cash payment later.
Et mollitia aut fugiat iste quo voluptatem omnis enim. Inventore earum omnis maiores.
Magni quod a ea error. Dolor corporis ullam alias ut earum voluptatibus. Adipisci porro et natus quisquam est quis. Reprehenderit unde veritatis dolorem quia animi ipsum. Voluptas dolor error ipsa consequatur.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...