Futures and Options are tools using which risk can be reduced or modified. Basically they are used as a hedging tool to protect against risks. However it is also used to speculate in the market.
Derivatives are assets whose value is determined from the value of some underlying assets. The underlying assets may be equity, commodity or currency. The most important types of derivatives are Forwards, Futures, Options, and Swaps.
Hi,
In response to your question
Your Question 1 :: Who decides the Premium for an Option and how?
Demand and supply ultimately determine the price of options, several factors have a significant impact on option premiums, which are the spot price, exercise price, volatility, time remaining to expiration, rate of interest and so on…
Your Question 2 :: What is an Arbitrage?
Arbitrage is the process of simultaneous buying and selling of a stock in spot and future in order to gain from a difference in the price. While getting into an arbitrage trade, the quantity of the underlying asset bought and sold should be the same.
Thanks a lot Mr. Naresh.