CFA Level I · CFA Level I Exam · Forward Commitment and Contingent Claim Features and Instruments
An investor buys a call option and a trader enters a long forward on the same asset. Compared with the forward buyer, the call buyer is most likely to:
The call buyer most likely pays a premium at initiation and has limited downside, since the loss is capped at the premium paid. The forward buyer pays nothing up front but is obligated to buy and can lose heavily if the underlying price falls.
- Apay a premium at initiation and have limited downsideCorrect
- Bface unlimited losses if the underlying price falls sharply
- Cbe obligated to buy the underlying at expiration regardless of price
Explanation
The call buyer pays a premium up front and can lose at most that premium, because the right need not be exercised. The forward buyer is obligated to buy and bears losses if the price falls. The other two options describe the forward position, not the call.
Did you get it right without looking?
One question tells you little. A timed set on Forward Commitment and Contingent Claim Features and Instruments shows your real accuracy, how long you take and where you lose marks.
More Forward Commitment and Contingent Claim Features and Instruments questions
- Which statement about exchange-traded versus over-the-counter derivatives is most accurate?
- A one-year swap has quarterly settlements with a fixed rate of 3.60% per year on a notional of USD 20 million. The floating rate set at the …
- Which of the following instruments is best described as a forward commitment?
- A fund manager expects to invest cash in floating-rate deposits and wants protection against falling rates while keeping the benefit if rate…
- A trader holds a long position in a futures contract. The futures price rises during the day. At the daily settlement, the trader's margin a…
- A credit default swap has a notional principal of $10 million and a standard coupon of 1% per year. After a credit event, the auction-determ…