had a long position; simultaneously, the speculator will deliver the 100 ounces of gold and receive $46,500 as per the second forward contract in which he or she held a short position. Because the $5,000 short-term profit cannot be realized for 9 months (settlement day for the two contracts), the net combined value of these forward contracts is the present value of the $5,000 to be received when they expire. With settlement in 9 months, if the risk-free rate is assumed to be 5%, the value of the “covered” original forward agreement is:

This represents a discount of $180.72 from the value of a comparable futures contract, which could be realized immediately by simply “selling” it in the futures market. It would appear, therefore, that the value of forward contracts should be less than that of comparable futures contracts because they are less liquid and expose the counterparties to more credit risk. However, these unfavorable factors are offset by the fact that forward contracts do not require the counter-parties to make margin or mark-to-market deposits, and they may receive slightly better tax treatment from a timing perspective. Empirical studies indicate that price differentials between comparable forward and futures contracts typically are negligible, suggesting that the advantages and disadvantages between forward and futures contracts are largely offsetting.

Option speculate

To .speculate by buying the option at one price and selling it for another, in the hopes of making a profit. Because the value of an option is based on the difference between the spot price of the underlying asset and the strike price of the option, option prices can be highly volatile. Furthermore, they are relatively low priced, so that small changes in the price of the underlying relative to a fixed strike price, can produce substantial changes in the return on the amount invested in the option. Speculators like the potential for high returns on small investment requirements.