CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
Compared with a forward commitment, a contingent claim such as an option is best described as one in which:
A contingent claim such as an option gives the buyer the right, but not the obligation, to exercise, so the payoff depends on a future event. The buyer pays a premium upfront, and the seller must perform if exercised. Forward commitments obligate both parties.
- Aboth parties are obligated to transact at a future date
- Bonly the buyer has the right to decide whether to exerciseCorrect
- Cneither party pays anything at initiation of the contract
Explanation
In an option, the buyer pays a premium and holds the right, not the obligation, to exercise, while the seller must perform if the buyer exercises. Both parties being obligated describes a forward commitment. An upfront premium is paid in an option, so the third statement is wrong.
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