NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
Which of the following is a feature of an equity index option traded on Indian exchanges such as the NSE?
Index options on Indian exchanges are cash settled at expiry because an index cannot be delivered physically. The buyer pays the premium upfront to the writer and holds a right, not an obligation, to exercise. Physical delivery of all constituent shares does not happen.
- AIt is cash settled at expiry, as the index cannot be physically deliveredCorrect
- BIt is settled by physical delivery of all index constituent shares
- CThe option writer pays the premium to the buyer at expiry
- DThe buyer is obliged to exercise the option on expiry
Explanation
An index is not a tradable asset, so index options are cash settled based on the settlement price of the index. The buyer pays the premium upfront to the writer, not the reverse, and the buyer has a right, not an obligation, to exercise.
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