One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer:
A) pays a much higher up-front price than option buyers.
B) has an obligation to purchase, not a choice.
C) can lose no more than the initial outlay.
D) has increased rather than reduced risk.

Question

Quizplus · Accepted Answer

The buyer of a futures contract has an obligation to purchase the underlying asset at a specific price and time, whereas the buyer of an option contract has the choice to exercise the option or not. This makes B the correct option. A is incorrect because both futures and options contracts have varying up-front costs depending on the asset and market conditions. C is incorrect because futures and options contracts both have the potential to lose more than the initial outlay. D is also incorrect because the level of risk depends on the specific contract and market conditions.

One Distinguishing Difference Between the Buyer of a Futures Contract