- CFA Exams
- CFA Exam: Level I 2021
- Study Session 16. Derivatives
- Reading 49. Basics of Derivative Pricing and Valuation
- Subject 7. The Value of a European Option at Expiration
CFA Practice Question
When a call option on a future is exercised, the buyer receives ______.
B. a long position in the underlying future and a cash payment
C. the physical good
A. an option to purchase the underlying future
B. a long position in the underlying future and a cash payment
C. the physical good
Correct Answer: B
The underlying asset of a call option on a future is the futures contract. When a call futures option is exercised, the buyer receives a long position in the future and a cash payment equal to the cash settlement price minus the exercise price of the futures option. Since the underlying asset is not a physical good, no physical good is received when the call option on a future is exercised.
User Contributed Comments 3
| User | Comment |
|---|---|
| johntan1979 | Isn't that amazing? Make money on the option (in-the-money), and then make more money on the future. |
| Inaganti6 | how is money made on the option...call had to be paid for.....short put and short call i can understand as you get the premium. |
| Kiniry | Does the cash payment come from the mark-to-market on the future once you actually own it? |