CFA Level I · CFA Level I Exam · Forward Commitment and Contingent Claim Features and Instruments
Compared with the holder of a long forward contract, the holder of a long call option most likely:
The long call holder pays a premium at initiation and has limited downside, because the loss cannot exceed that premium. The holder has the right but not the obligation to buy, unlike a long forward holder, who must transact and can lose heavily if prices fall.
- Apays a premium at initiation and has limited downsideCorrect
- Bhas an obligation to buy the underlying at expiration
- Chas unlimited loss if the underlying price falls sharply
Explanation
A call buyer pays a premium up front, and the most that can be lost is that premium. The buyer has a right, not an obligation, to buy. A long forward holder has an obligation and can lose substantially if the price falls, so the other options describe forward-like features.
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