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Element 322 on the paper20 in the bank

Types & features

How futures, forwards, options, CFDs, swaps and structured notes work — rights vs obligations, listed vs OTC, leverage, and the risks each contract actually transfers.

  1. 3.1

    Futures and forwards

    • Both sides are obligated. Long profits if the price rises; short if it falls.
    • Listed = standardized, margined, CCP-cleared. OTC forwards = customized, bilateral counterparty risk, lower liquidity.
    • Speculators prefer futures for exchange liquidity.

  2. 3.2

    Options

    • Buyer has the right; seller has the obligation. Calls vs puts; American vs European.
    • American puts can be worth more because of early exercise of intrinsic value.
    • Deep OTM listed options: the acute risk for the holder is liquidity — wide spreads and price concessions on exit. Clearing removes seller default risk.
    • Selling a naked call: limited premium vs potentially unlimited loss.
    • Time value decays to zero at expiry; premium then equals intrinsic value only.

  3. 3.4

    CFDs

    • Weekend gap risk: stop-losses may fill only at Monday’s reopen, at worse prices.
    • Typical retail CFD margin ~10%. If equity falls toward the close-out level, a margin call restores required equity.

  4. 3.5

    Swaps

    • Each party exchanges cash flows on agreed terms. Notionals are usually not exchanged on IRS.
    • Pay-fixed / receive-floating: primary downside is lower floating receipts if rates fall.
    • Currency swaps typically exchange notionals at start and end, so FX moves on the notional create P&L.
    • Commodity swaps net the fixed vs floating price on the notional quantity.

  5. 3.8

    Leverage

    • Leverage amplifies gains and losses relative to capital posted.
    • Option leverage ≈ underlying market value / premium paid (e.g. $150 / $10 = 15:1).
    • Futures leverage ≈ notional / margin (e.g. $500,000 / $25,000 × 4% move = 80% return).

  6. 3.9

    Structured products

    • Principal-protected note: zero-coupon bond + long call.
    • Capital-at-risk notes may embed knock-in puts to cheapen conditional protection.
    • Downside-buffer notes use embedded options for asymmetric upside participation.