Explanation:
Only statement II is correct. An option contract gives the holder the right, but not the obligation, to buy or sell the underlying asset at a specified price within a certain period of time or on a specific date. This means that the holder can choose to exercise the option if it is beneficial to them, or let it expire worthless if it is not. On the other hand, futures and forward contracts obligate the holder to buy or sell the underlying asset at a specified price on a specific future date. This means that the holder is legally bound to fulfill the terms of the contract, regardless of whether it is beneficial to them or not. Therefore, Jessie's statement II accurately describes the fundamental difference between options and futures/forward contracts.
Choice A is incorrect. Statement I is not correct. While it's true that the cost of entering into a futures contract is typically zero, this isn't the case for options or forward contracts. Options require an upfront premium to be paid by the buyer to the seller, and while forward contracts don't usually require an upfront payment, they do have a cost in terms of opportunity cost or potential credit risk.
Choice C is incorrect. As explained above, statement I is not correct which makes this choice incorrect.
Choice D is incorrect. Since statement II is correct, this choice is incorrect.
Q.724 Jessie Leeson has spent her last semester studying abroad at the University of Vienna. She took advanced finance and derivatives courses during her semester abroad where she studied pricing, valuing, hedging, and trading strategies involving derivatives. During a meeting with her colleagues, one of them asked her to outline the similarities and differences between options, futures, and forwards. She made the following statements:
I. The cost of entering into an option or a futures contract is zero, but forward contracts have a cost.
II. The holder of an option has a right but not an obligation to exercise the option, while the holder of a futures/forward contract has an obligation to honor the contract.
Which of the following is correct?
A
Only statement I is correct.
B
Only statement II is correct.
C
Both statements are correct.
D
None of the statements is correct.
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