Which of the following is not true regarding using an option to hedge financial risks versus a forward contract?
A)An option is a right to buy or sell an underlying, while a forward contract is an obligation.
B)An option requires an initial cash outlay, while a forward contract does not.
C)Both options and forwards are said to have asymmetric or one-sides return profiles.
D)All of the above are true.

Question

Which of the following is not true regarding using an option to hedge financial risks versus a forward contract?
A)​An option is a right to buy or sell an underlying, while a forward contract is an obligation.
B)​An option requires an initial cash outlay, while a forward contract does not.
C)​Both options and forwards are said to have asymmetric or one-sides return profiles.
D)​All of the above are true.

Quizplus · Accepted Answer

Options have asymmetric or one-sided return profiles because the buyer has the right but not the obligation to execute the contract, leading to a scenario where they can benefit from favorable price movements while limiting losses to the premium paid. Forward contracts, on the other hand, have symmetric return profiles because both parties are obligated to execute the contract at the agreed-upon price, leading to unlimited potential gains or losses.

Which of the Following Is Not True Regarding Using an Option