CFA Practice Question

There are 206 practice questions for this study session.

CFA Practice Question

A contract places an obligation on a trader to sell a security at a fixed price to the other party on or before a specified date at the discretion of the latter. This is a ______.
A. forward contract or futures contract
B. put option
C. call option
Explanation: An option is an obligation on the part of the writer. If the holder of a call option decides to exercise the option, the writer is obligated to sell the underlying at the fixed price, irrespective of the price of the underlying in the market.

User Contributed Comments 9

User Comment
gpeterkin A Forward is an obligation to deliver aswell!
mtcfa Yes but here the question states you are obliged to sell at the DISCRETION OF THE PARTY. Therefore this is a call. In a forward, both parties are obligated.
linr0002 yes the word "discretion" is impt.
andy4cfa Another indicator to exclude forward is that "on or before a specific date", this can only be an (american) option, not a forward.
surob Good question
boddunah its pretty dirty.
ars2011 so does it mean that even though forward contract is understood as an obligation , it is only an obligation only to the counterparty , for the buyer of the option it stays a contingent claim only to be exercised at his discretion
Inaganti6 mtcfa you da man. now only if i had a keen eye like you.
Jdadd21 Forward contract is traded on expiration, therefore the holder cannot decide to carry out an early exercise.
You need to log in first to add your comment.