Which of the following best describes the relationship between options and futures?
A)Options limit gains and losses while futures limit only losses.
B)Futures limit gains and losses while options limit only losses.
C)Buyers of futures must pay a premium in addition to a small brokerage fee while buyers of options do not pay a premium.
D)Options are much cheaper than futures.

Question

Quizplus · Accepted Answer

Futures and options are both derivatives, but they have different characteristics. Futures contracts limit both gains and losses, while options only limit losses. This is because a futures contract involves an obligation to buy or sell an underlying asset at a predetermined price, whereas an options contract gives the holder the right but not the obligation to buy or sell the underlying asset at a predetermined price. Therefore, if the price of the underlying asset moves against the holder of a futures contract, the losses can be significant. On the other hand, if the price moves against the holder of an options contract, they can simply let the option expire and only lose the premium paid for the contract.

Which of the Following Best Describes the Relationship Between Options