Futures and Option (F&O) Contract

Recently, the Securities and Exchange Board of India (SEBI) has asked local hedge funds to declare their futures and option (F&O) trades and the underlying stocks on which such equity derivative positions were built.

About ‘Futures and Option’ contract –

• Futures Contract — It is an agreement between buyer and seller to buy or sell an asset at a certain time in the future at a certain price.
  • • • The buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.
      • Underlying assets include physical commodities and financial instruments (stocks, currencies and bonds etc.)
      • They are subjected to high risk and can reap unlimited profit or loss.
• Option Contract — An option is a contract that gives an investor the right but not the obligation to buy or sell a commodity at a specified price at a specified future date.
  • • • They carry limited risk and can reap either unlimited profit or loss.
      • Advance is paid in the form of premiums in option contracts.