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Author: Admin | 2025-04-27
Example, precious metals such as gold and silver have been offered as Futures since 1974 and 1933 respectively by CME. Gold has been traded since ancient times in the form of barter/spot exchange, and it’s fair to say that derivatives are an evolution to trading methodologies. Similarly, as the cryptocurrency market matures we can expect new cryptocurrency derivative products becoming available.In the financial world that is derivatives, there are three main types of products: Options: An agreement between two counterparties that provides one with the right but not an obligation to transact in the future. Forwards/Futures: An agreement between two counterparties that obligates them to transact in the future based on the contract terms set. Swaps: An agreement between two counterparties where both agree to periodically exchange fixed & floating rates over a period of time. Now we understand that this all seems like a lot to digest, so keep reading on for a little “spooky” surprise that’ll help you understand these more easily! Derivatives in Crypto - OptionsWe’ve put together a very “spooky” analogy (just in time for Halloween 👻) that’ll bring you through the concept of Options. Behold:In our analogy, we assume that an option is sold for $5 with an expiry date on Halloween Day. The buyer of said option is bullish on the costume price (expect future price to go up), while the seller is bearish on the costume price (expect future price to go down). Here are the payoffs to the buyers and sellers in both scenarios. Halloween Day Event Buyer Seller Costume price goes up to $200 Can buy costume for $100. Total expenditure is $105 (including $5 premium). Made $5 (premium paid by buyer), and has to sell costume to buyer at $100 (forgoing profit upside). Costume price goes down to $30 Will not buy the costume for $100. $5 paid as premium is non-refundable. Made $5 which was the premium paid by buyer. In essence, you can see this as a form of “insurance” where the option contract has allowed our buyer to hedge himself against a price increase for a premium
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