Question

1. Which of the following is right:

	A.	"Out-of-the-money” option gives options writer profit which exceeds option premium.
	B.	“at-the-money” is the breakeven point of negative and positive payoffs for option holders.
	C.	“in-the-money” means option holders will definitely profit by exercising the option.
	D.	Option writer earns option premiums as payoffs when the option is “at-the-money”.

2. What is the main difference between the forward contract and the future contract?

	A.	Forward contract looks forward, but future contract looks future.
	B.	Forward contract looks backward, but future contract looks past.
	C.	Forward contracts are customized contracts, but future contracts are standard contracts.
	D.	Forward contract is obligation, but future contract is right.

3. What is the difference between European and American option?

	A.	European option gives the holders rights for buying assets, but American option gives the holders rights for selling assets.
	B.	European option is executed only on the expiration date, but American option could be executed any time before the expiration date.
	C.	With the same terms, European option is more expensive than American option.
	D.	European options are sold in Europe, and American options are sold in the U.S.

4. What’s the difference between the future contract and the option contract?

	A.	Futures require holders to deliver the physical underlying assets, and exposure in options can be closed out by doing reversing trading.
	B.	Futures are obligations to holders, and options are rights to holders.
	C.	Futures are usually used to hedge, and options are usually used to speculate
	D.	Futures are customized derivatives, and options are standardized securities.

Answer 1

1.(B)at-the-money” is the breakeven point of negative and positive payoffs for option holders as it is always equal to the excercise price and it acts a break even and it doesn't have any intrinsic value.

2. (C)Forward contract are customized according to the needs of different parties where the future contracts are standardized form of contracts and cannot be customised so option (C) is correct

Forward & future contracts are both to be exercised on future specific dates. So rest of the options are false.

3. (B) European option is executed only on the expiration date, but American option could be executed anytime before the expiration. This statement is true as it is the major difference between the two types of options.

Rest of the options are false as American option and europian options ste exercised globally.it is not name based excercise.

4. (B) Future contract are obligatory in nature while option contract gives the buyer with with a right to excersize . Option are not obligations.

Both contracts can be settled without physical settlement.

So option (B) is correct.