GAFM GLOBAL ACADEMY OF FINANCE AND MANAGEMENT  ®

2.  Options: Options provide the holder with the right but not the obligation to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) on or before a specific date (expiration date).

3.  Swaps: Swaps are contracts where two parties exchange cash flows, often involving interest rates or currencies. Interest rate swaps, for example, allow entities to exchange fixed-rate and floating-rate interest payments.

Derivatives are versatile tools used by institutions, corporations, and individual investors. They can be employed for risk mitigation, income generation, and speculative purposes. However, the complex nature of derivatives requires a deep understanding of the underlying assets and markets to use them effectively.

III. Options

Options are a specific type of derivative that grant the holder the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) on or before a specified date (expiration date). Options provide investors with flexibility and can serve various purposes:

1.  Call Options: Call options allow investors to profit from rising asset prices. If the market price surpasses the strike price before expiration, the holder can buy the asset at the lower strike price, realizing a profit.

2.  Put Options: Put options, conversely, provide a way to profit from falling asset prices. The holder can sell the asset at the strike price, which is higher than the market price, resulting in a gain.