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 premium than option buyers
B)Has an obligation to purchase, not a choice
C)Can lose no more than the initial premium
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 the specified price and date, whereas the buyer of an option contract has the choice but not the obligation to buy or sell the underlying asset. Therefore, option buyers pay a premium for the right to exercise their option, while futures buyers do not have the same optionality and thus do not pay a premium for it. Additionally, futures contracts have unlimited potential losses, whereas option buyers can only lose the initial premium paid for the option.

One Distinguishing Difference Between the Buyer of a Futures Contract