After reading your post, I would like to add some information that will provide more insight regarding options and forwards. An option offers holders the right and no obligation to sell or buy an asset at a precise time. A call option depicts the right to buy, whereas a put option is the right to sell. Just like the name suggests, parties to the agreement can choose not to enforce the accord when the need arises including failure to agree on prices. Forward contracts, on the other hand, are binding accords to sell or buy assets at a stated price on a specific duration. For instance, two groups might agree to trade 2000 ounces of gold at USD 2,500 for each ounce on December 1. A single party to such accord will have a duty to purchase, and the other is obliged to sell. The contracts can incorporate anything of value involving bonds, stocks or foreign currencies among other things.
The advantages of forward contracts are clear including buying now and paying at a later date, there is a lock in present exchange rate for a future receipt or purchase, and hedges exposure while further reducing risk. Forward contracts are simple to set and maintain and parties can draw down to attain currencies at an earlier date. Despite the numerous gain of this form of hedging, there are some drawbacks. For instance, if the currency moves against a specific party, there is a possibility of missing gains. In forward contracts, the small deposit needed still ties up the capital. Options are flexible, they provide the opportunity of gaining leverage for both parties, and reduce risks that might be incurred in the long term. However, option contracts are complicated and include the use of computers. Using computing machines requires knowhow, something not available to everyone.
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