Module: Introduction to Futures, Options, and Hedging Strategies
1. Module Overview
This module introduces futures and options as core derivative instruments and explains how they are used to manage real-world financial risk through hedging strategies.
2. Learning Objectives
By the end of this module, you will be able to:
- Understand how futures and options function
- Apply basic hedging strategies
- Interpret payoff outcomes visually
- Analyze real-world risk management cases
3. Core Concepts (Quick Recap)
- Futures → Obligation to buy/sell at a fixed price
- Options → Right (not obligation) to buy/sell
- Hedging → Reducing risk using offsetting positions
4. Visual Diagrams (Payoff Structures)
4.1 Futures Payoff (Linear Relationship)
Profit
|
| /
| /
| /
| /
|/
———————-> Price
(Strike Price)
Meaning:
- Profit increases as price rises
- Loss increases as price falls
- No protection on downside
4.2 Call Option Payoff
Profit
|
| /
| /
| /
|_______/
------------------> Price
(Strike Price)
Meaning:
- Limited loss (premium paid)
- Profit only when price rises above strike
- Upside potential remains
4.3 Put Option Payoff
Profit
|
|\
| \
| \
| \_______
|
----------------------> Price
(Strike Price)
Meaning:
- Gains when price falls
- Acts as protection (insurance)
- Loss limited to premium