NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
Which statement about margins in exchange-traded equity derivatives is correct?
An option buyer pays the premium upfront and is not required to pay margin, because the loss is limited to that premium. Option writers and both sides of a futures contract pay margins, which are collected continuously rather than only at expiry.
- AThe option buyer pays the premium upfront and is not required to pay marginCorrect
- BThe option buyer must pay initial margin equal to the full contract value
- COnly the futures seller pays margin, the buyer does not
- DMargins are collected only on the expiry day
Explanation
An option buyer's maximum loss is the premium, which is paid upfront, so no margin is levied. Option sellers and both parties to futures pay margins, which are collected from the start and marked to market daily.
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