Which one of the following statements is correct?
A) An option seller makes more profits than an option buyer.
B) A futures seller makes more profits than a futures buyer.
C) A futures buyer's profit will be equal to the futures seller's loss.
D)Both the buyer and the seller of a futures contract earn a profit simultaneously.

Question

Quizplus · Accepted Answer

Futures contracts involve a buyer and a seller agreeing to purchase/sell a particular asset at a particular price on a particular date. The buyer hopes that the price of the asset will rise before the delivery date, while the seller hopes that the price of the asset will fall. If the price of the asset rises, the buyer can buy it at the lower contracted price and sell it on the open market for a profit. The profit earned by the buyer will be equal to the loss incurred by the seller, and vice versa. Therefore, choice C is the correct statement. Choices A and B are incorrect because in both cases, one party (the seller) cannot consistently make more profits than the other party (the buyer). Choice D is incorrect because if both parties in a futures contract earn a profit simultaneously, it would imply that there was no underlying risk being hedged, and this is not the true nature of futures contracts.

Which One of the Following Statements Is Correct