Options are contracts in which the terms of the contract are standardized and give the buyer the right, but not the obligation, to buy (call) or sell (put) a particular asset at a fixed price (the strike price) for a specific period of time (until expiration).
the right to call (buy) a security at the strike price up until the expiration date of the option from the person that issued the call.
If I sell you a call option on IBM with a strike price of $190 and an expiration date of 1/1/2009, you have the right to exercise the option until its expiration and force me to sell you IBM for $190. You will exercise the option only if IBM rises above the strike price of $190.
the right to put (sell) a security at the strike price up until the expiration date of the option to the person that issued the put.
If I sell you a put option on IBM with a strike price of $150 and an expiration date of 1/1/2009, then at any time between now and 2009 you can force me to buy a share of IBM for $150. You would exercise your put option only if the price of IBM falls below the strike price of $150.
A market for contracts that provide for future delivery of a good at some pre-specified price. Futures markets exist for commodities, bonds, and foreign currencies.
Example: If I agree to a 1/1/2009 futures contract to buy 1000 bushels of corn at $3.00 per bushel, I am committed to buying corn on that date at that price. The other party to the contract is committed to sell 1000 bushels at $3.00 per bushel. The person who agrees to buy corn has “bought” a futures contract. The person who agrees to sell the corn has “sold” a futures contract.
If the expected price of a commodity in the future rises, the futures price will rise.
The price in futures contracts provides an indicator of what people believe about the movement of prices in the future.
Mutual Funds: a firm that pools money from many small investors to buy and manage a portfolio of assets and pays the earnings back to the investors. Mutual funds can be categorized in several ways. For example:
index funds (S&P 500 or Willshire 5000)
international funds (invest in foreign securities; exchange rate risk)
bond funds (invest in bonds)
balanced funds (invest in bonds and stocks)
growth funds (invest in companies viewed as having high growth potential)
sector funds (invest in a particular sector of the economy; e.g. health, or financial services).
tax-exempt income funds (invest in tax exempt bonds)
money market funds (invest in short term government securities)
The major advantage of mutual funds is that it allows a person to invest in the stock market and be diversified .