Which of the following statements is true when comparing the payoffs at maturity of a long forward contract with a long position in a call option,assuming the strike price of the option is the same as the delivery price in the forward contract?
A)The maximum (i.e. ,best-case)payoff of the forward contract exceeds that of the option.
B)The minimum (i.e. ,worst-case)payoff of the forward contract exceeds that of the option.
C)The minimum payoff of the option exceeds that of the forward contract.
D)The maximum payoff of the option exceeds that of the forward contract.

Question

Quizplus · Accepted Answer

The option provides the holder with the right but not the obligation to buy the underlying asset at the strike price. Therefore, if the asset's price at maturity is less than the strike price, the minimum payoff of the option is zero, whereas the minimum payoff of the forward contract is negative. Hence, the minimum payoff of the option exceeds that of the forward contract, making choice C the correct answer.

Which of the Following Statements Is True When Comparing the Payoffs