An investor who exercises a call option on an index must
A) accept the cash difference between the index and the exercise price
B) purchase all of the stocks in the index in their appropriate proportions from the writer
C) immediately buy a put option to offset the call option
D) immediately write another call option to offset
E) none of the above

Question

Quizplus · Accepted Answer

When an investor exercises a call option on an index, they do not need to purchase all of the stocks in the index. Instead, they will receive the cash difference between the index and the exercise price of the option. This is the most common way of settling index options. Therefore, choice A is the correct answer.

An Investor Who Exercises a Call Option on an Index