Difference between futures contract & options contract

What is the basic difference between a futures contract and an options contract?

Both futures contract and options contract are known as derivative contracts. In a futures contract, there is an underlying, the notional amount and an expiry date. In the case of an options contract, apart from the above, there is also a strike price. The fair value of a futures contract is determined by the cost of carry and corporate actions of the underlying, if any. However, the fair value of an options contract is determined based on the implied volatility of the underlying. The option premium is determined based on Black Scholes formula or based on binomial method of calculating the premium on options contract. The risk-reward of futures contract is symmetric and for option contract it is asymmetric. In the case of options contract for bought call option position, the profit potential is virtually unlimited while the maximum loss is the call premium paid. In the case of sold call option, the profit is restricted to the premium received while the potential loss is unlimited. In the case of bought put option, the maximum profit is the strike price while the maximum loss is the premium paid. In the case of sold put option, the maximum profit is restricted to the premium received while the maximum loss is the strike price as reduced by the put premium.

Definition of derivative instruments

Definition of derivative instruments Are derivative instruments specifically defined in the standards and if so, where? A derivative instrument is a subset of financial instrument with mainly three characteristics, viz, its value changes in response to a change in the underlying variable, it requires no or low initial net investment and its settled on a future date. In the definition of financial asset, derivative instrument is covered under (c) (ii), viz, to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity. Purchased call options and put options and derivatives having a positive fair …
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What are Ind AS accounting standards?

What are Ind AS accounting standards? The Ministry of Corporate Affairs (MCA) on 16th February 2015 notified the Companies (Indian Accounting Standards) Rules, 2015 containing 39 Indian Accounting Standards (Ind ASs). Ind ASs are based on International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB). The roadmap for applicability of Ind AS mentions that Ind AS will be applicable in a phased manner depending upon the listing status as well as the net worth of the company. The roadmap is applicable to non-financial companies, i.e., companies other than banking, insurance and NBFCs. During these phases, the financial companies, …
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Roadmap for implementing Ind AS?

Roadmap for implementing Ind AS? The roadmap for implementing Ind AS in a phased manner is given below. All non-financial companies For companies other than banks, NBFC and Insurance companies: Voluntary Phase 1st April 2015 or thereafter: Voluntary Basis for all companies (with comparatives) Phase I 1st April 2016: Mandatory Basis All listed on Stock Exchange in India or outside having net worth equal to or more than Rs 500 croreUnlisted companies having net worth equal to more than Rs 500 croreParent, Subsidiary, Associate and Joint Venture of above Companies can voluntarily apply Ind AS for accounting periods beginning on or after 1st April 2015. If an entity applies …
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Ind ASs relating to financial instruments

Ind ASs relating to financial instruments What are the Ind ASs relating to financial instruments? Financial instruments are primarily governed by three standards as per Ind AS, viz, Ind AS 32, Ind AS 109 and Ind AS 107. Ind AS 32 defines financial instruments, financial assets, financial liabilities and equity instruments. Ind AS 32 deals with financial instruments from the perspective of an issuer. It primarily addresses the presentation-related issues and provides guidance whether a financial instrument should be considered as a financial asset, a financial liability or an equity instrument. Ind AS 32 also addresses compound instruments that contain both liability and …
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What is the significance of Ind AS 32?

What is the significance of Ind AS 32 Ind AS 32 is the converged Accounting Standard of IAS 32 Ind AS 32 deals with financial instruments from the perspective of an issuer and provides guidance as to how an entity should present a financial instrument either as a financial asset or financial liability or as equity instrument. Ind AS 32 also provides guidance about the bifurcation of compound instruments into liability and equity components. The classification is extremely important because this has a wider import regarding the way the instruments are presented in the balance sheet as well as the manner in which …
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Ind AS for financial instruments replica of IFRS?

Ind AS for financial instruments replica of IFRS? Are the Ind AS relating to financial instruments an exact replica of its counterpart, viz, IFRS? Ind AS 32 is the converged standard of IAS 32. Ind AS 109 is the converged Ind AS of IFRS 9. Ind AS 107 is the converged Ind AS of IFRS 7. As on date, it may be correct to state that the Ind ASs relating to financial instruments are more or less a replica of its IFRS counterpart, even though there is one major carve out in Ind AS 32 and one major exception provided in Ind …
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Scopes of the three standards for financial instruments

Scopes of the three standards for financial instruments Are the scopes of all the three standards viz., Ind AS 32, Ind AS 109 and Ind AS 107 similar? Ind AS 32 is the converged standard of IAS 32. Ind AS 109 is the converged Ind AS of IFRS 9. Ind AS 107 is the converged Ind AS of IFRS 7. While the scope of all the three standards is more or less similar, it should be noted that these are not identical as each one of these standards are subject to different exclusions. The entity, therefore, should be cautious to the extent …
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Contract to deal in non-financial item

Contract to deal in non-financial item Is a contract to buy or sell a non-financial item, a financial instrument? A contract to deal with a non-financial item is not a financial instrument. However, there are certain contracts to buy or sell a non-financial item that may be required to be accounted for as a derivative as per the financial accounting standards, eg, where the contacts to buy or sell a non-financial item that can be settled net in cash or another financial instruments or by exchanging financial instruments, as if the contracts were financial instruments. In other words, even though these contracts …
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Contract meant for own use

Contract meant for own use Can a written option that results in the delivery of a non-financial item be treated as a financial instrument, as the non-financial item is meant for own use? If the derivative contract is a purchased call option or a future contract to buy a non-financial item, this may be covered under the own use exemption, as a result of which such contracts may be outside the scope of the financial instruments standards. Some written options like written put option may also result in the physical delivery of a non-financial item. For example, a written put option contract to …
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Difference between forward contract & futures contract

Difference between forward contract & futures contract What is the difference between a forward contract and a futures contract? A forward contract is a derivative instrument between two parties to buy or to sell an asset at a specified future time at a price agreed upon today. A forward contract is non-standardised. The party agreeing to buy the underlying asset in the future at the delivery price assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. On the other hand, a futures contract is a derivative contract which is a standardised forward …
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