NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
In an exchange-traded equity option contract, which party has an obligation to perform if the buyer chooses to exercise the option?
The option writer is obliged to perform if the buyer exercises. The buyer pays a premium for a right, not an obligation, whereas the seller, having received the premium, must deliver or settle according to the contract terms when the buyer exercises.
- AThe option writer (seller)Correct
- BThe option buyer
- CThe clearing corporation's investor protection fund
- DThe stock exchange's listing department
Explanation
An option buyer pays a premium and obtains a right, not an obligation. The writer receives the premium and must perform if the buyer exercises. The buyer is therefore not obliged to act, and the other parties are not counterparties to the exercise obligation.
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