An option gives the buyer
A) The right but not the obligation to undertake the trade specified in the contract at maturity.
B) The obligation but not the right to undertake the trade specified in the contract at maturity.
C) The right to cancel the contract at any time prior to maturity.
D) The same obligation as in a forward contract.

Question

Quizplus · Accepted Answer

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date. The buyer has the choice to exercise the option or let it expire. Therefore, option A correctly defines the buyer's right. Option B is incorrect since it states that the buyer has the obligation to undertake the trade, which is the opposite of what an option contract provides. Option C is incorrect since options are not cancellable contracts. Option D is incorrect since a forward contract imposes obligations on both parties.

An Option Gives the Buyer