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Which of the following statements is true when comparing the payoffs at maturity of a long...

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?

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Answer #1

Forward contract is a contract entered between two parties to buy a asset at specified price on a specific date.

Options gives a right but not an obligation to the holder to buy or sell an asset at a certain date at a certain rate

Call payoff = (Spot Price - Strike Price ) (Where S>X) or Zero (Where S<X)

Forward Payoff = (Spot Price - Strike Price)

  • Under options, option holder has a right whether to exercise the option or not. However, there is no such option available with forward contract
  • Hence there the payoffs can worse be zero under call options . Payoffs can also be negative in case of forwards
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