I need help responding to this student's response. It must include works cited.

A futures contract is a legally binding agreement between two parties to buy or sell a specific asset, such as a commodity or financial instrument, at a predetermined price and date in the future. The buyer of a futures contract agrees to buy the asset at the agreed-upon price on a specific date, while the seller agrees to sell the asset at the agreed-upon price on the same date.

An options contract, on the other hand, is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and date in the future. Unlike a futures contract, the buyer of an options contract is not obligated to buy or sell the underlying asset, but they do have the right to do so if they choose.

The main reason to use either futures or options contracts is to manage risk. Both contracts allow traders to hedge against price movements in the underlying asset, which can be especially useful in volatile markets. For example, a farmer may use a futures contract to lock in a price for their crop before they have even planted it, to protect against the risk of a price drop at harvest time. An investor may use an options contract to protect their stock portfolio from a potential downturn.

In addition to managing risk, futures and options contracts can also be used for speculation. Traders who believe that the price of an asset will increase may buy a futures or options contract in the hopes of profiting from the price increase. Conversely, traders who believe that the price of an asset will decrease may sell a futures or options contract in the hopes of profiting from the price decrease.

Overall, futures and options contracts are important tools for managing risk and speculation in financial markets. By using these contracts, traders and investors can protect themselves against unexpected price movements and potentially profit from their predictions about future market trends.

Works cited

"Investopedia." Investopedia, 2023, www.investopedia.com/ask/answers/difference-between-options-and-futures/.

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