Explanation:
The correct answer is A.
Options contracts indeed offer more flexibility than futures contracts. The primary reason for this is that options contracts provide the holder with the right, but not the obligation, to buy or sell the underlying asset at a predetermined price and date in the future. This means that the holder can choose whether or not to exercise the option, depending on market conditions. This gives the holder more flexibility than futures contracts, which obligate both parties to fulfill the terms of the contract. This flexibility is particularly beneficial in volatile markets, where the ability to choose whether or not to exercise the option can help limit potential losses and maximize potential gains.
Choice B is incorrect. Options contracts are not traded exclusively in the OTC market. They can also be traded on organized exchanges.
Choice C is incorrect. The statement about the payoff profiles of options and futures contracts is reversed. Options contracts have a non-linear payoff, while futures contracts have a linear payoff.
Choice D is incorrect. The value of an option is not independent of the volatility of the underlying asset; rather, it's highly dependent on it. Higher volatility generally increases the value of an option because it increases the likelihood that the option will end up in-the-money at expiration.
Q.5349 A risk manager at a large energy company is presenting at a seminar on derivative contracts to a group of newly hired energy traders. The manager focuses on the advantages and disadvantages of using options contracts and futures contracts for hedging in the energy markets. Which of the following statements is correct?
A
Options contracts provide the holder more flexibility than futures contracts.
B
Options contracts are traded exclusively in the OTC (over-the-counter) market.
C
Options contracts have a linear payoff, while futures contracts have a non-linear payoff.
D
The value of an option is independent of the volatility of the underlying.
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