Question

Who will gain if the price of an underlying asset falls?

• A. the seller of a futures contract
• B. the buyer of a put option
• C. the buyer of a call option
• D. the buyer of a futures contract
• E. both (A) and (B)

Answer 1

Futures contract is a contract for buying an underlying asset in the future for a price determined today. It is exchange traded.

Put option gives the holder the right but not the obligation to sell the underlying asset at a pre-defined price in the future.

Call option gives the holder the right but not the obligation to buy the underlying asset at a pre-determined price in the future.

A. This option is true factually but it is not the answer as one more option is true. The seller of the futures contract will sell the underlying to thw buyer of the contract at a predefined price. As the underlying assets' price has decreased, the buyer might want to buy from the open market but due to thw contract it cannot do so. And the seller would get a price better than the market. Thus, the seller of futures contract gains.

B. This option is true factually but it is not the answer as one more option ia true. Put option gives the right to sell at a pre determined price. When price of assets falls, put becomes more valuable as it can be exercised and asset can be sold at a higher price than current price.

C. False. Buyer of call option gains when price of underlying asset rises. When price falls, call may expire worthless.

D. False. Buyer has obligation to buy at the set price which may be higher than current market price.

E. Correct. As option A and B are true.

Thus, correct answer is E.