Comparison of options and futures contracts

At this point we will compare currency futures and currency options.A company interested in hedging or speculating on an increase in the value of the pound sterling can purchase a pound sterling currency future, or purchase a pound sterling call option.Further, if the acquisition of the currency future or call option is purely speculative, with no offsetting short position in that currency, the potential gain and loss is quite different for the future as compared with the call option.The currency future can increase or fall in value.Therefore both potential gains and losses are very large.By contrast the call option contains a limited loss (premium cost)but unlimited potential gain.

Finally, we can obtain an overview of the position of a buyer or writer of call and put options.We see that the buyer of the call option faces a limited loss (based on the premium paid for the option), but an unlimited profit.The writer of the call option faces a limited profit (premium)but potential unlimited loss.The buyer of the put option faces a limited loss (premium paid), but unlimited profit.The writer of the put option faces a limited profit but unlimited potential loss.