Question

You sign an exclusive sales contract agreement with company "One Stop Shop". This is close to

A.) Put option

B.) Call option

C.) Forward Contract

D.) None of the above

Answer 1

The correct answer is -

C) Forward contract.

Forward contract is a private agreement between two parties to buy and sell a specified asset at a specified date in future.

Each forward contract is a customized contract and parties agree upon the terms such as price, quantity, quality, expiration date well in advance. The underlying asset of the contract can be a stock, a bond, commodity, foreign currency, etc and settlement of the forward contract occurs at the end of the contract on the settlement date.

It cannot be call or put option as an option is a derivative which gives the right not an obligation to the option holder to buy or sell the specified asset at a specified price. The seller of the option has to oblige the contract if it is exercised.

There is no obligation on part of the buyer of the call or put option. He may or may not exercise the option.

Hope it helps!