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Differentiate between options contract and swap contract
Both options and swaps are derivatives of financial instruments. Both values depend on the underlying asset.
Options
Right to buy or sell the asset at a pre agreed price at a particular date. Important terms used in this are exercise date, strike price and option premium. It is in the non-recoverable amount.
- Exercise date - Date on which option should be exercised.
- Strike price - Price at which option should be exercised.
- Option premium - Price paid to acquire option.
The types of options are as follows−
- Call option - At pre agreed date and price, buyer has right to buy financial asset.
- Put option - At pre agreed date and price, buyer has right to sell financial asset.
- Exchange traded instruments - These are traded only in organized exchanges at standardized investment sizes.
- Over the counter instruments - In absence of structured exchange, these agreements can materialize.
Swaps
To exchange the financial instruments, parties arrive at an agreement. Cash flow is common swaps.
The different types of swaps are as follows −
- Interest rate swaps - Parties exchange based on notional principal amount to hedge against interest risk.
- Commodity swaps - Commodity swapped instead of amount. in this one commodity will have fixed rate and other commodity will have floating rate.
- Foreign exchange - Interest and principal amounts are exchanged based on different currencies. Generally, it takes place in terms of net present value.
- Plain vanilla - It is the most basic type of swap contract.
Differences
The major differences between options contract and swap contract are as follows −
| Sr.No | Options contract | Swap contract |
|---|---|---|
| 1 | It’s a right to buy or sell financial assets at a set price on a specific date. | It’s an agreement between parties to exchange financial instruments. |
| 2 | Bought or sold through exchange/developed over the counter. | It’s over the counter financial products. |
| 3 | Premium payment is paid. | No premium payments are required. |
| 4 | Types of options contracts are call option and put option. | Types of swap contracts are interest rate swaps, foreign currency (FX) swaps and commodity swaps. |
Updated on: 05-Jul-2021
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